Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

MJ ERVIN & ASSOCIATES

Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

MJ ERVIN & ASSOCIATES

...................................... 63 Figure 34: Montreal .............................................. 25 Figure 7: Outlet Representation by Mode...............Price History .............................. 53 Figure 28: Vancouver ........................................................ 66 Figure 35: Saint John NB .................. 44 Figure 21: Gross Marketing Margin Elements .......................................................................... 50 Figure 27: Victoria ................ 56 Figure 30: Regina ............................... 46 Figure 23: Average Annual Throughput per Outlet.............. Costs.............................................. 24 Figure 5: Canadian Retail Outlet Population .............................Price History ...................................................Selected Centres .......................................................................................................................Price History...............................1988-1995 ....................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56.............................................. 36 Figure 17: Study Market Methodology ...................................Price History ............................................ 47 Figure 24: Outlet Volume vs........................ 57 Figure 31: Winnipeg .....Price History ....... Gross Product Margin ............................ 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) .......................... 48 Figure 25: Outlet / Volume Relationship .......................................................................................................... 69 Figure 36: Halifax ..............................Price History .................................... 24 Figure 6: 1995 Retail Outlets by Province ...........................Regional & Urban Groupings..................................... 49 Figure 26: Outlet Revenues.............................................................................. 42 Figure 19: Pump Price .......................................................Price History.................................................................................................................... ex-tax elements ............. 4 Figure 2: 1996 Average Prices/Margins .............................. 43 Figure 20: Ex-Tax Pump Price Elements ................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)......... 54 Figure 29: Calgary ...............Price History ................................. 40 Figure 18: 1995 Average "Blended" Pump Price ..................................................................................................................................... 58 Figure 32: Toronto .........................................................................................Price History......... Income......................................Regular Unleaded ................Price History............. 71 MJ ERVIN & ASSOCIATES i ....... 34 Figure 15: Monthly Rack Prices: Selected Markets .......................List of Figures Figure 1: Pump Price / Margin Model....................Selected Goods & Services ....................................................................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category........................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ....................................Price History....8¢ Pump Price) .......................tax.... 45 Figure 22: Petroleum Gross Product Margins ....................................................................................................................................................................................................... 62 Figure 33: Ottawa . 70 Figure 37: Charlottetown .............. 28 Figure 8: Outlet Representation by Service ......................................... Pump Price (nominal ¢/litre)................................................................................................. 29 Figure 9: Annual Gasoline Price (Cents per Litre) .................................................................................................... 33 Figure 13: Monthly Gross Marketing Margins............................................................ 35 Figure 16: Monthly Demand vs. 30 Figure 10: CPI Index Comparison .................................

...................................................................................... 51 MJ ERVIN & ASSOCIATES ii .... 1996 .................................................... 15 Table 3: Selected Study Markets ........................................................................................List of Tables Table 1: Downstream Sales Channels ..... 13 Table 2: Taxes on Regular Gasoline on December 31............... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.................

1 ¢ 5.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. represented by crude. the Canadian retail marketing sector realized an average gross product margin of 3. dealer income. Price competition occurs at three distinct levels in this industry. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and a foundation for effective policy development.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. and the Canadian Petroleum Products Institute (CPPI). Natural Resources Canada (NRCan). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and ex-tax pump prices.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. supplier costs and profitability. These prices are determined in a competitive marketplace.5 ¢ 0.5 cents per litre on the sale of regular gasoline in a typical major urban market. together with a separate review of the refining sector.8 ¢ TAX 28. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. This study.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. each with unique MJ ERVIN & ASSOCIATES iii . This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.2 ¢ 24.4 ¢ 19. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. 1996 Average Prices and Margins . rack.3 ¢ 28.

well over half of all outlets in Canada operate as lessees or independents. which potentially allow for reduced margins at the gasoline pump. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. due to its prominence in the public and media domain. this study focuses on the retail gasoline sector. are examples of ways in which outlet petroleum sales are augmented by other revenues. compared to about 22. While each of these marketing channels operates in a competitive environment. The resultant margins are therefore a reflection of the state of product supply. and declined by 10 cents per litre measured in constant dollars. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure.000 in 1989. Convenience store. From 1986 to 1995. Dealers have a variety of relationships with their supplier. and accordingly. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $).500 retail outlets were in operation in Canada in 1995.dynamics. nine of the past ten years. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. and the traditional automotive service bay. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . car wash. demand and other competitive factors existing at the time. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Approximately 16.

the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. From 1991 to 1996. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. MJ ERVIN & ASSOCIATES v .rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. As a result of these trends.crude) 5¢ Marketing Margin (retail . however. and has been a result of several factors including: • • • improved refinery utilization and efficiency. This has both resulted in. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .The “tax-included” nominal pump price increased over this same period. as a consequence of refinery plant rationalization (closures) and a modest demand increase. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.

When petroleum gross product margins were compared to their corresponding outlet throughputs. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. With few exceptions. A wide range of petroleum gross product margins were evident. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. but also had significantly higher throughputs per outlet. were selected for a detailed review of outlet economics. and one by one. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. That such a relationship should exist was not surprising. to derive 1995 average petroleum gross product margins for each of the 19 markets. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. MJ ERVIN & ASSOCIATES vi . several “outside variables” (product taxes. wholesale product cost and freight charges) were isolated from the pump price. This was integrated with selected NRCan price data. rural markets. 19 markets representing a broad range of conditions. With the participation of several CPPI member companies.Comparison of Canada. although this study provides an independent confirmation of this. This provided for market-bymarket and regional comparisons of key competitiveness indicators. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry.

revenues from ancillary operations (eg: convenience store.000. These costs would include salaries of marketing representatives and management. This study showed that an average outlet net revenue in the 19-market study group was about $70. sales processing. Consequently.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000 2. which reflects his investment in the outlet.000. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000.. an additional goal of this study was to undertake a comparison of outlet profitabilities. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue.000 3. of which gross product margin and throughput are only two of several factors. the residual revenue is available as profit to be re-invested into retail operations. head office and regional office overheads. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .962 R2 = 0. and/or distributed to shareholders.000 6. brand advertising.6634Ln(x) + 76.000.000. and his personal labour investment. corporate charity.000 Volume (litres) 4. and in major vs. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000. supplier profit: after the above costs are allocated. etc.000 5.• Smaller markets performed as competitively as larger centres. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. smaller markets. not poor competition. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.6624 1.

000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Although an objective measure of competitiveness is elusive.000) $(100. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000 $50. were insufficient to cover outlet costs.000) $(250. after allowing for estimated dealer profit and supplier overhead. The Canadian retail petroleum products industry.000 $100. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 $200.000 $250. 1. and that petroleum sales revenues alone. suppliers likely incurred a net loss on outlet operations in 1995. for which this study had no specific data. at 1995 prices. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000) $(350. $61.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . distant outlets are clearly higher than those associated with concentrated urban markets.000) $(150.$154.000 per year. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) $(200.000 vs. Despite this difference. by all objective measures available to this study.000) $(300. respectively. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.market study group. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.000 $150.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

MJ ERVIN & ASSOCIATES

ix

While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

MJ ERVIN & ASSOCIATES

x

driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

MJ ERVIN & ASSOCIATES

xi

Nevertheless. Both the downward trend in margins. Also. and the associated industry initiatives which are ongoing in nature. serve as perhaps the most significant indicators of competitiveness in the downstream industry. although this study provides comprehensive evidence of this. in the long term these fluctuations are likely more reflective of market restorations. Indeed. most outlets used in the 19-market study represent major integrated oil companies. Also. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Thus. 8. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. While these economics might appear to place this industry in a position of poor viability. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). 7. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Thus. Industry profitability is extremely sensitive to very small changes in pump price. despite the predisposition of many observers to use them as such. assuming all other costs were unchanged. regardless of size. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). had petroleum margins which were commensurate with average outlet throughput for that market. and in turn.• • • improving production efficiency through refinery plant rationalizations (closures). A wide range of petroleum gross product margins were evident within the 19market study group. Thus. not excessive profits. Outlet throughput is a key determinant of inter-market pump price differences. crude costs. most markets. based upon an assumed posted rack price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. When plotted against the margin-volume model. When these margins were compared to their corresponding outlet throughputs. this industry sector would have realized profits of unprecedented proportions. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. if Canadian average pump prices were only one cent higher than they were in 1995. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. That such a relationship should exist was not surprising. these findings clearly show that pump price increases are ultimately linked not to increased profits. virtually all of the 19 study markets exhibited similar levels of competition. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. but to increases in underlying rack prices. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year.

product margins than larger markets. according to the margin-volume model. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. average pump prices were relatively high. A full-serve retail gasoline outlet typically employs 3-5 staff. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. more isolated markets are generally higher than in larger centres. it would seem that if local government in smaller markets were interested in lowering pump prices. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. While competitiveness in most smaller markets was shown to be as active as in larger centres. In suggesting this approach however.5 million fewer litres of gasoline than a group A (major centre) station. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. isolated markets face particular challenges: although found to be highly competitive. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. reduce pump prices. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. the solution would be to encourage some dealers to exit the market. which could actually inhibit competition. MJ ERVIN & ASSOCIATES xiii . in order to build upon the findings in this study towards a full understanding of the dynamics at work. The costs of most consumer goods in smaller. reducing the number of outlets may also reduce the number of competitors. and this study showed that gasoline prices were no exception. poor outlet throughputs were generally the predominant factor. The loss of employment represented by a station closure may be of some concern to smaller communities. Smaller. there are three points to consider: • • In very small markets. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). which should. • • At first glance. 9. thereby improving petroleum volumes and ancillary revenues at the remaining sites. This created some economic pressure to sell product at a higher pump price. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. other factors exist which contribute to relatively high margins and prices.

will likely preserve a highly competitive petroleum market. Convenience store. The historical record is clear however: since deregulating pump prices. and as such. The federal Competition Bureau for example. Also. and the traditional automotive service bay. does not appear to benefit in consumer terms. MJ ERVIN & ASSOCIATES xiv . is viewed as an agency which exists to the benefit of industry and consumer alike. This study proposes rather. is well beyond the scope of this study. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. and the perceived effect on their markets. many national and local environmental regulations exist for good cause. car wash. Retail ancillary operations are a critical element of petroleum price competition. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. As these findings show. has seen a decline in pump prices relative to other Canadian markets. and likely others in Nova Scotia. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). are an acceptable limitation on pure competition (Finding 8). the degree of price competition in the retail petroleum has in effect. direct regulatory interventions may have an adverse effect on competitiveness. 11. is both the cause and consequence of increased activity in ancillary operations. characterized by narrow product margins and relatively flat pump prices. as it does in the Canadian petroleum marketing sector. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and in turn. sometimes below that of outlet operating costs. the Halifax market. as marketers find even more innovative ways to attract market share. that where a healthy competitive climate exists.10. depressed petroleum revenues. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. possibly to the detriment of the consumer. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. This competition then. under the current PEI regulatory structure. Charlottetown. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). were cited as examples of ways in which outlet petroleum sales are augmented by other revenues.

Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. and the nature of competitiveness influences. along the lines of the model used in this study. A regular comprehensive competitiveness evaluation. and the converse image held in much of the public domain. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. • • MJ ERVIN & ASSOCIATES xv . Public perception measurement. petroleum marketing competitiveness. 2. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness.1. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. in a simple format designed for consumers and legislators. Develop cooperative industry research into marketing sector competitiveness issues. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. margins and competitiveness factors. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. This should be in the form of a quarterly summary of price trends and related measurements. not inhibit. using Canadian and foreign selected markets. using Canadian and foreign selected markets. Improve public understanding and awareness of competition in the petroleum marketing sector. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices.

the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. MJ ERVIN & ASSOCIATES xvi . is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and in particular. and issues/opportunities facing such markets. using Canadian and foreign selected markets. • * * * Better understanding of this industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. consumers. and regulators alike.

Project Objectives The working group established as the primary objective of this study “. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. In 1995. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. competitive pressures from US and offshore refiners.to better understand the competitive opportunities and challenges. including a regional...to analyze the rack to retail market and the market structure for refined petroleum products. Specific purposes of this study would be: • • • • “..to draw comparisons with nearby USA markets..to determine the key factors which drive competitiveness in specific markets.. A working group represented by Natural Resources Canada (NRCan). to name a few. The SCF laid the foundation for supplementary studies.. and in comparison to the Canadian national average and nearby USA markets”. and Industry Canada was convened to undertake this project.” MJ ERVIN & ASSOCIATES 1 . Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.. which comprise the “downstream” oil industry. and in the process.. and regional differences which face the petroleum products retail industry. and that issues and challenges be identified so that conclusions and recommendations can be made “..Introduction Background Canada’s petroleum refining and marketing sectors.to provide a sound database upon which more effective policy decisions can be made. and MJ Ervin & Associates was selected to undertake the “rack to retail”.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and . . or even communities within the same region. region by region across Canada. and a challenging array of potential environmental initiatives. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.to help the industry cope and to enhance competitiveness. the Canadian Petroleum Products Institute (CPPI). more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. . face a number of challenges: a poor public image... leading to more effective policies and reduced uncertainty for future investment. or petroleum marketing portion of the study..

undertaken as part of this project to: • make a more detailed examination of price. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . due to the considerable data gathering difficulties that such an approach would entail. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. and the effect of competitiveness on each subsector. • Part E: Conclusions and Recommendations summarizes the study findings and.The study meets these objectives. and a foundation for effective policy development. in Appendix I. Part C: Historical Trend Analysis provides an overview of prices. margins and demand patterns over the past several years. from which some important findings are made. Findings are stated in bold and are summarized in part E of this report. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Unless otherwise stated. Supporting data to these charts can be found in Appendix II. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. and in order to provide insights into the range of competitive dynamics that can exist. The study does provide comparisons with US markets on a national level of detail. Many of the findings in this report are presented in graphical form. or which have a specific meaning in the context of this report. It also relates consumer demand patterns to pump price fluctuations. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Part D: Selected Market Study presents the findings of a diverse 19-market study. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. presents conclusions and recommendations which arise from the study findings. Specific comparisons of specific Canadian and US consumer markets were not made. through a multi-faceted approach. Ultimately.

These included: Canadian Tire Petroleum. and also participated in the steering committee. Consumers Association of Canada.. including Ultramar Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). through Bob Clapp. Finally. • • Several organizations participated in two key review sessions. and their 481 retail associates whose outlet data was used in our analysis. Suncor Inc. Petro-Canada.. and provided critical guidance and feedback at several key stages in the process. Ontario Ministry of Environment and Energy. Imperial Oil Ltd. Ministère des ressources naturelles du Québec. Natural Resources Canada. CPPI. for their assistance. chaired the steering committee.• Industry Canada. and Industry Canada.. Shell Canada. Environment Canada. The Canadian Petroleum Products Institute.. Petro-Canada. facilitated some of the data gathering needs of this study. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. We gratefully acknowledge these companies. through Maureen Monaghan and Huguette Montcalm. assisted in securing the support and participation of member companies in the selected markets phase of the study. MJ ERVIN & ASSOCIATES 3 . NRCan. and Shell Canada. Suncor Inc.

most Canadians relate to this industry in one specific way: as consumers. Yet. its price. In fact. These relationships can be modeled. as they are in Figure 1. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. principally of motor gasoline. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. And. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. or taste. but simply. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . and serves to explain several factors that together determine retail gasoline prices at any given time. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. as this study shows. It is this particular feature of petroleum products .price . unlike many consumer products. multifaceted industry. texture. the particular quality of gasoline which is of most interest to consumers is not its colour.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast.

Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. gross margin represents revenue only. So defined.or margin . A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. any operating expenses must then be considered before making any determination of profits. While this term is often associated with the phrase “profit margin”. margins are squeezed or expanded accordingly. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. these stakeholder revenues are derived from the revenue from the retail sale. (implying that the stated margin represents net income or “profit”). an understanding of the term itself is necessary.Many of the terms introduced and explained in this section are used extensively throughout this study. Each margin is quantified by its defining prices. it is important to define the term “margin”. evaluating competitiveness is therefore a partly subjective process. objective measurement for competitiveness. this study’s use of the term relates to gross margin. each essentially taking a share1 . and in fact inextricably related. is more likely to equate the term with “value for money”. A consumer however. MJ ERVIN & ASSOCIATES 5 . Gross margin is simply the difference between two price points.from the total pump revenue. From an industry perspective. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. Ultimately however. While both perspectives are valid. “competitive” may be synonymous with “viable”. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. consumer perspective. this study examines competitiveness from the latter. Before examining each of the model elements. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).

This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. An effective functioning of markets also permits smaller competitors to expand if they meet the test.. Simply put. and unless care is taken to use the word precisely. Accordingly. represents a process by which prices are set. Conditions for a competitive market can be deemed to exist when: • • more than one. Since a competitive market effectively limits the price option. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. Inevitably. a universally acceptable definition of competitiveness is elusive. this usually requires a reasonable number of competitors. and ideally many entities offer the same or similar products (brand variety).. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive).Unlike many business or economic concepts. as competitors seek to attract market share through lower prices. or in other words. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. competitors can either restore higher prices or reduce costs.” Price Competition in the Oil Industry In order to assess competitiveness. More importantly. in order to maintain some level of brand variety. reducing costs.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. one must ask how marketers compete. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. Price competition. improving efficiencies. the result of price competition is reduced profit. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. The actions by business rivals place an upper limit on the prices a firm can charge for its products. if market conditions allow a sufficient number of players to remain profitably engaged. the degree of competition within a market. Competition can only be sustained therefore. it can frustrate communication and obscure analysis. is the only real option in the long term. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. Technological change and innovation are the large levers of competition in industry.” “. To achieve this. 1986: “Competition may mean very different things to different people. and the entry of new competitors and new ideas. in the sense in which it is something in the public interest. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . provide some means for comparing the type and to some extent.

and as will become more evident in this study.the variables at their disposal. which in turn defines the margins. or four P’s: Product. It is also important to stress that the market ultimately sets rack and retail pump prices. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius.44 (1st Dec. Within the broad context of the oil industry.. 1960) 2 Although distinct. Given the commodity nature of petroleum products. The converse notion that the industry establishes a “should be” margin.: Richard D. and are beyond the scope of this study. most Canadians relate more in terms of retail gasoline marketing. the raw material from which gasoline is made. and in retail markets. Irving. so a brief description of these. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. Jerome McCarthy. Nevertheless. Basic Marketing: A Managerial Approach. Ill. A refiner in Toronto may well compete with a refiner in Buffalo. (Homewood. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. which in turn defines a proper market price. In fact. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. New York. whose main 1 E. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and are generally known as integrated oil companies. is false. 1971). and the downstream industry. • Thus described. Price. Place. the geographic scale of competition is an important consideration. in rack markets. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. commonly known as the “marketing mix”1. and Promotion. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. the “oil industry” consists of two distinct industries: the upstream industry. MJ ERVIN & ASSOCIATES 7 . the most effective of these as a competitive tool is price. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. some organizations have operations in two or more of these markets. particularly in the crude (upstream) industry and refiner sector. p. whose main activity is the exploration and development of crude oil. The dynamics of upstream and refiner competition are major studies in themselves. competition in the crude and rack markets deserves some mention. 4th Ed. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production.

it is probably sufficient to say that. which it does on a continuous basis. its marketing operations). It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. rather than a fixed value. due to variables such as crude quality. and refinery production methods. and transportation of crude oil to the refinery plant. Canadian producers are known as “price takers” rather than “price setters” of crude prices. as a minor contributor to the world crude supply. MJ ERVIN & ASSOCIATES 8 . In providing historical comparisons of crude to rack/pump prices. alongside major producing countries such as Saudi Arabia. in several commodities trading centres around the world. Within the scope of this study. Canadian producers must compete to sell their production to refiners. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. and in the open market structure that exists in Canada. which finds and produces crude oil . production. consequently.activity is the refining of crude oil into petroleum products. from the exploration for potential crude or gas reserves. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. implying that it fluctuates. it is important to examine its relationship with its neighboring downstream industry. While this study focuses on the downstream industry (and in particular. gasoline grade. our crude prices rise and fall according to price benchmarks established far beyond our own shores. which gives an accurate portrayal of month-to-month crude price fluctuations. Infrastructure The upstream oil industry encompasses a broad range of operations. drilling.the raw material from which gasoline is made. and the delivery and sale of these products to the consumer. Although this industry is not the focus of this study. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. that is to say. Crude oil is a commodity which is traded in a global marketplace. Canadian producers have virtually no influence over world crude prices. The upstream industry’s crude price is represented in Figure 1 as elastic.

A modern refinery is a sophisticated work of engineering. oil producers must explore for potential reserves. and pay out royalties to the resource owner.While some suggest that the price of gasoline should rise and fall exactly with the crude price. day-to-day plant operations are cost-intensive. who manufacture petroleum products from crude oil. its predominant feature is the plant facility which. As a general measure: Finding 2: 1996 average crude price. diesel. and numerous safety and environmental safeguards. drill for. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. In addition. as a factor of the regular gasoline retail pump price. in the petroleum sector. heating fuels. and from this feedstock. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. As is typical of many manufacturing organizations. and hopefully realize some production. This sector acquires crude oil. which in oil producing provinces such as Alberta. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. crude is only one of several factors that influence pump prices. is the provincial government. involving energy. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. was 19. buy refined products from the refiner and sell them to the end-use customer. or roughly 34 percent of the pump price. From this revenue. put simply.1 cents per litre. MJ ERVIN & ASSOCIATES 9 . and some attention to the refiner sector is therefore given here. is called the refinery. personnel. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. maintenance. manufactures a range of refined petroleum products including gasolines. The focus of this study is on the marketing sector of the downstream petroleum industry. and marketers who. and lubricants.

The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. While refineries are always rack price points. being squeezed or expanded between these two price points. Wholesale volume data is not readily available on a market-specific basis. contract price . external measurement of the current market value of a particular petroleum product. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. which can be broadly categorized as follows1: • • • rack price . In fact the refiner typically pays a higher price than the benchmark crude price. 2 MJ ERVIN & ASSOCIATES 10 . In simple terms. there would be little or no market-driven competitiveness in the refiner sector. 1 Dealer Price is not included here. indicative of a competitive wholesale rack market. This margin provides for plant operating costs as described above. only rack price information is readily available in the public domain. representing major Canadian population centres. transfer price . In fact. as they relate to negotiated. as this price point exists within the marketing sector. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. reflecting the cost of transporting the crude from the producing region to the refinery plant. Contract and transfer prices are not openly shared. Although contract and transfer prices are distinct from rack price. they use rack price as their basis. If for example. the gross refiner margin is elastic. since the market-driven rack price provides an objective. For a competitive rack market to exist. this model only uses the benchmark crude value. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. refiners sell their product under a variety of arrangements. not the refiner sector. but with no material effect upon the Gross Product Margin derivation.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. the relative competitive strength of any given rack market is difficult to assess. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. which may cause Gross Refiner Margin to be slightly overstated. the gross refiner margin is the price at which the refiner sells its refined product.the price charged for immediate supply on an “as available” basis. less the price at which it bought its raw material2 (rack price minus crude price). some clear competitiveness indicators exist. Since both crude and rack prices fluctuate according to market forces. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. For simplicity. and a return on the considerable capital investment in the plant facility. and accordingly. On a national basis however.Price/Margin Model Elements For simplicity. The existence of rack price in a given market is not of itself. confidential terms between the seller and specific buyers. many of which do not have integral refineries. Of these three refiner prices.this is the “internal” price charged by a refiner to the marketing arm of the same company. which provides an independent and objective determination of rack-based gross refiner margin.

wholesale refined product is bought and sold across very large distances. As shown in Figure 15 (page 35). market-driven Rack (wholesale) pricing of petroleum products. petrochemical producers. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. In practical terms. but at the expense of marketing income. for example. In practice. even overseas.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . potential sources of wholesale product supply for most Canadian non-refiner marketers. MJ ERVIN & ASSOCIATES 11 . integrated refiner-marketers establish transfer prices at. Canadian refiners must therefore be price competitive not only with each other. The mechanisms that drive rack prices are more fully discussed on page 36. 1 Based on Octane Magazine Retail Outlet Survey data. who compete for a share of this demand. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). as there is no obvious market mechanism to regulate its setting. and in the case of gasoline. would produce better than expected refiner income. most refiners also participate in the marketing and retailing of petroleum products. the question of the internal selling price. due to the relatively small transportation cost. this limits a marketer to a relatively short range (perhaps 1. or close to. many US and European refineries are in practice. to so-called “independent” petroleum marketers. and which supply petroleum to about one-third of all retail outlets in Canada1. but where pipeline or marine fuel terminal facilities exist. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. In these cases of so-called “integrated” refiner-marketers. in order to maintain realistic accountabilities within each of the two sub-sectors. In examining the structure of the Canadian refiner sector. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. market-driven rack prices. to major industrial consumers.for example. or transfer price. but with their US and European counterparts. who themselves do not refine petroleum products. Integrated Refiner-Marketers In Canada. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. from any one of several regional refiners. arises.000 km) for overland truck transport.

media and regulatory attention. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Marketing operations within this sector can be broadly classified into three elements. and aviation. gasoline price and competitiveness issues attract considerable public. in the minds of many consumers. principally into commercial trucking operators’ vehicles. It is this sector which has direct contact with the petroleum consumer and it is this sector. each with its own distinct infrastructure. and who essentially deal directly with the refiner. or in the case of cardlock facilities. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. • • MJ ERVIN & ASSOCIATES 12 .Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. and purchase at or near the established rack price. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Within this industry sector. which “sets” the retail price of gasoline. as a popular and relevant “window” on the petroleum marketing sector. product is sold from a central facility. farming. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. including mining. Retail Sales to the domestic motorist. trucking. For this reason. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. home heating. the most recognized element of the downstream oil industry. Wholesale Sales to a wide variety of customers.

to the motorist consumer. Sales to non-refiner petroleum marketers. Retail outlets are operated in a variety of modes. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Before examining this sector in detail. These outlets usually have considerable inventory capacity. at a negotiated contract price. often delivered by pipeline or ship/barge. which primarily serve long-disttance truckers and commercial delivery and haulage operators. according to the contractual relationship between the supplier and the dealer.500 retail gasoline outlets in Canada. There are over 1. Sales of home heating fuels to residential furnace oil customers. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. Direct sales generally do not involve any marketing sector infrastructure. in smaller centres. Sales of petroleum products through bulk sales outlets. which is generally less than the rack price. and regular gasoline in particular. such as product transport and/or storage. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general.300 bulk sales outlets in Canada. Sales to commercial and industrial accounts by the wholesale marketing sector.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. as discussed. typically at the “rack point”. Sales to spot buyers at posted rack price. using delivery tank trucks. for example. Sales to major industrial accounts. Sales of aviation fuels at major and secondary airports across Canada. MJ ERVIN & ASSOCIATES 13 . one final element of the pump price model must be reviewed. as principal elements of petroleum marketing operations. by delivery tank truck. usually involving some aspect of the marketing sector infrastructure. In major centres dedicated Home Heat centres provide this service. There are about 16. heating fuel delivery is an integral part of a bulk sales outlet. and usually supply customers by delivery to the customer’s own storage tank. to the aviation fuel consumer. Sales of petroleum products (principally gasoline) through retail gasoline outlets. There are over 850 cardlock outlets in Canada. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities.

in a small number of markets. Table 2 shows the provincial tax content for retail gasoline. regardless of market conditions. 1 Due to the application of GST (and in Quebec. stable amount. A three-cent drop in pump price. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. and seven percent GST. MJ ERVIN & ASSOCIATES 14 . tax content does fluctuate somewhat with pump price changes. typically made up of: • • • • a ten cent per litre federal excise tax.3 in Quebec) drop in the tax content. municipal taxes. the tax content of the petroleum price is essentially a pre-determined. The petroleum industry acts as a collector of these taxes. If the pump price decreases for example. provincial sales tax. for example. the tax content of retail gasoline in Canada has increased steadily over several years. which amount to 28. would include a roughly 0. As part C of this study shows.2 cent (0. PST). or roughly 50 per cent of the pump price. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin.6 cents per litre (Canada 1996 10-city average).

0 14.9 3.2 cent per litre pump tax.4 3.0 10.0 10.0 GST content (7% of pump) 3.0 10.5 cents and 4.3 Federal Excise Tax 10. plus a 6.1 32. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.3 20.0 9.3 10.6 3.0 28.5 14.8 note 1 note 2 An additional tax of 1.0 10. MJ ERVIN & ASSOCIATES 15 .6 3. All Quebec gasoline sales are subject to a 15.6 3. Provincial Tax 11.2 24.0 cents is charged in the greater Victoria and Vancouver areas respectively.6 22.5 Total Tax 24.0 4.Table 2: Taxes on Regular Gasoline on December 31.0 10.3 27.0 10.0 10.7 30.8 4.0 3.5 6.0 15.0 28.0 11.0 10.5% sales tax applied to the GST-inclusive pump price.6 25.5 12.0 10.1 25.0 16.7 3. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 10.5 cents was introduced in the Montreal and surrounding area in 1996.7 13.0 10.0 27.2 10.7 18.0 3.6 3.5 3. An additional pump tax of 1.2 24.0 10.

The residual.1 ¢ 5.5 ¢ 0.3 percent of the average regular gasoline posted pump price. to derive a representative value for regular gasoline gross product margin in Canada. this section provides a view of the Canadian petroleum marketing sector. MJ ERVIN & ASSOCIATES 16 .8 ¢ TAX 28. or 50.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. including retail outlet distribution. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. Figure 2: 1996 Average Prices/Margins . It also provides an overview of the industry in terms of several infrastructure parameters. some profit return for the shareholder. 3.5 cents per litre (after freight cost). and ancillary operations. or 34 percent of the pump price. namely the dealer’s costs and income. based on regular unleaded gasoline. Upstream operations realized 19. Refiner operations realized 5.6 cents per litre.4 ¢ 19.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. or 9 percent.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. was available for product marketing operations.3 ¢ 28.1 cents per litre. the brand supplier’s costs. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).3 cents per litre. and the retail gasoline sub-sector in particular. operating modes.2 ¢ 24. and potentially. This 1 Prices and margins reflect a Canadian 10 city average.

and is then transported to the retail outlet.3 cents per litre. petroleum taxes accounted for 50. In 1996. and it is depicted in Figure 1 as a fixed cost element. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Freight cost does not typically fluctuate. for example) is sold/transferred at the current rack or transfer price. Based on the 1996 data. In referring to marketing margins and product margins. or “rack to retail” margin. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. as part C will describe.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. Both refiner and marketing margins have been in decline over the past several years. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. is usually the gas station.5 cents per litre. this is seen as a “non-core” business. was 3. Although many petroleum marketers conduct their own freight operations. which in the case of retail gasoline. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. The marketing sector then. Bloomberg rack price values were used as the assumed wholesale price. it falls into the domain of the marketing sector. and is often out-sourced to third-party common carriers. is the second of two elements of the downstream oil industry. As the product leaves the refinery plant. In 1996. and rack price. the finished product (gasoline. See page 10 for further explanation. The gross marketing margin.3 percent of the average urban price of regular gasoline in Canada. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. Freight MJ ERVIN & ASSOCIATES 17 . three key findings can be stated: Finding 4: Finding 5: In 1996. is defined by the marketdriven price points of ex-tax pump price. was 5.

3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. but at an average cost of over $200.5¢ Product Operations Freight 0.000 per outlet. Posted pump price includes all of these variables. rural markets experience higher pump prices than do larger centres. as it represents 80% of all retail gasoline sales. and upstream/refiner margins. together with gas station dealers. petroleum marketers.1¢ Tax 28.3¢ 3.costs are generally less than one-half cent per litre in most major Canadian cities. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Unlike most other retail enterprises however. an average gross product margin for regular gasoline in a major Canadian city was 3. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.8¢ Pump Price) Upstream Operations 19. • Product sales: Within this domain. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .5 cents per litre in 1996. which are typically close to a wholesale rack point.6¢ Refiner Operations 5. Gross product margin is therefore defined as gross marketing margin less freight cost. and is therefore a poor comparative tool. storing and dispensing a product such as gasoline adds considerably to the operating cost. As represented in Figure 3. This is a particularly useful measurement in comparing retail gasoline markets. freight. incur a variety of costs. as it excludes the “outside variables” of tax. Figure 3: 1996 Average Regular Gasoline Margins (56. typical of any retail business.

(Homewood. Today. marketers compete for the consumer’s choice of transportation energy (for example. but most consumers view gasoline as a commodity. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. rather than the most places. A portion of the market certainly responds to this type of competitive strategy. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. will ultimately purchase based on price. one must ask how marketers compete. and accordingly. Ill. additives. marketers compete to be represented in as many and/or the best locations as possible. 1 Diesel is another petroleum product sold at many retail outlets. 1960) MJ ERVIN & ASSOCIATES 19 . it represents a very small percentage of total retail petroleum sales. In order to measure competitiveness. gasoline). Jerome McCarthy. a number of factors preclude this type of strategy. marketers have attempted with some success to differentiate their product offerings from other brands. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. competitive activity can be observed when a marketer alters one or more of the variables at their disposal.” or four P’s: Product. and Promotion.: Richard D. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. seasonal blends. or when comparing price levels between markets. commonly known as the “marketing mix2. Today. etc. page 24). Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. and the price difference between these grades and the RUL price is referred to as the grade differential. • Product In the past decade. Place Typically.retail gasoline sales respectively1. Although revenue from this product is factored into the study market economics in Part D. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Place. p.44 (1st Dec.. Price. and 9 cents per litre for premium gasoline. 1971). propane vs. RUL prices are therefore most often cited when relating historical price trends.). competitive strategy of this type focuses heavily on selecting the best place. Basic Marketing: A Managerial Approach. but in 1995 was typically 5 cents per litre for midgrade. This study does not examine such a broad issue however. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Price competition has forced marketers to optimize outlet revenue. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. as gas stations proliferated. Irving. Simply put. Higher octane grades are more expensive than RUL. The grade differential varies somewhat from city to city. 4th Ed. expanded product/services offerings such as convenience items. 2 E.

while uniform pump prices are sometimes cited as evidence of industry collusion. caused by price competition. Consequently. In this context. this study examines the dynamics of price competition in considerable detail. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. gasoline is viewed by consumers as a commodity uniform in quality and widely available. MJ ERVIN & ASSOCIATES 20 . price has proven to be the most widely used competitive tool by gasoline marketers. uniform prices . Examples are: • prominently displayed prices . Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Promotion In the gasoline retailing sub-sector. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. and due to the already slim margins available to marketers. gasoline is a commodity.contrary to some public perception. is less clear. due to the largely commodity nature of petroleum product. • • • While examples of all of these indicators are abundantly in evidence. their subsector margins. volatile pricing manifests itself in the form of a price war (see below). it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. Promotional activity seems to have decreased in the past few years. Establishing an objective measurement of price as a competitiveness indicator however.• • closure of non-viable outlets. volatile prices . This study presents an extensive historical and comparative analysis of pump prices. free item with purchase or special price item with purchase. • Price In most markets. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. and therefore “trades” within a relatively narrow price range. At its extreme. and more importantly. As such. low prices and/or margins. Examples of promotional competition are: • • • brand identity gasoline discount coupon.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. probably due to its relatively high cost. fluctuating pump prices are a significant indicator of robust competition among marketers.

obviously at the expense of the supplier margin. Pump prices therefore tend to move uniformly within a very short time. in order to maintain a reasonable market share. the effect on many consumers is immediate: they will drive into that station. MJ ERVIN & ASSOCIATES 21 . or even less than. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. one must adopt the perspectives of both consumers and competing. bypassing the higherpriced outlet. competitors may not follow. in an attempt to gain market share. but to competitors. In the case of lessee or independent dealers however. Pump price signs are an ubiquitous feature of the retail gasoline industry. Finding 7: Price uniformity and price volatility. are indicators of a competitive market. since they too must restore their gross product margins to sustainable levels. If the posted price increase is too high.where the ex-tax pump price is equal to. While this support may take one of several forms. since there is no “dealer margin”. who then react quickly to the change. When this occurs. or when prices rise or fall apparently in unison. the supplier may temporarily intervene. or even being squeezed to zero . the wholesale rack price. This is a misconception. its effect is to restore some measure of the dealer margin. Whether through falling pump prices or rising rack prices.When pump prices are uniform. competitors will likely match this price. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. The effect of this upon the gross marketing margin is obvious: it is squeezed. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. 1 This does not occur at company operated or commission outlets. for example). the relationship between the supplier and dealer is generally as described on page 25. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. or even undercut the competitor’s lower price. To understand the phenomenon of uniform pump prices. Price Support In times of “normal” pump prices. If one dealer decides to reduce pump prices (by two cents. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. The other dealer has little choice but to quickly match. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. facilitated through street price signs. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. adjacent dealers. assuming that the rack price is unchanged. and provide to the dealer what is commonly referred to as price support.

the petroleum marketing sector has been the subject of several inquiries at federal. Following a year-long investigation. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. which is administered by the federal Competition Bureau (Industry Canada). The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. An examination of the effect of the Competition Act. provincial and even municipal levels. however.Under the provisions of some price support mechanisms. 1997 MJ ERVIN & ASSOCIATES 22 . Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. and a brief discussion of this case appears in part D. In addition. resulting in 9 convictions. These cases have largely involved local dealers and/or isolated incidents. is beyond this study’s scope. More recently. A review of historical retail pump prices in the Halifax. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. There are few current examples of direct government intervention in the pricing of petroleum products. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. control over retail pump price effectively reverts to the supplier. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. While this study does not intend to undertake a detailed review of the effect of the Act. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. or of direct government intervention in marketing. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. but reverts back to the dealer when the support arrangement is ceased. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. the Bureau found that there was no evidence to support these allegations1. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. In addition. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products.

Retail gasoline sales. As a product group however. accounting for 41% of all petroleum demand. MJ ERVIN & ASSOCIATES 23 . This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. to some degree. and at least some of this capital cost is regulatory compliance-driven. exit from an non-viable market. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. The high cost of building a modern retail gasoline outlet for example. sales of gasoline through the roughly 16.500 retail gasoline outlets across Canada. accounting for roughly 88% of all gasoline demand. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. or incentive for. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. is in part. These regulations clearly exist to the benefit of all. it is the single largest one. entry into an attractive market. inhibit competition. It is important to acknowledge that many regulations affecting the retail gasoline industry. Many smaller retail owner-operators. So defined. and is the single largest market for gasoline products. Conversely. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). and consequently. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. particularly in smaller population centres. it is clear that government policy plays an important role in facilitating. higher pump prices. as outlined above. that is. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. This issue is discussed more fully in part D. A practice. a competitive climate. or incentive for. one can cite examples of regulatory obstacles to exit from the retail gasoline market. but exist to meet other important societal needs. accounts for about 37% of all refined petroleum demand in Canada. or inhibiting. for safety and environmental protection. in the form of standards for the decommissioning of retail petroleum sites.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. creating a need for higher margins. promotes or limits market-driven pump prices. creates an obstacle to.

3% Total Sales Volume: 84.9% Diesel Fuel 22.2% Other 0.2% Retail Gasoline 37.it has no practical means to enumerate each and every outlet.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This study provides an estimate of the actual retail outlet population.7% Lube/Grease 1. This survey accounts only for major established retail networks .6% Other Gasoline 4.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Propane /Butane 2. as shown in Figure 5. nor is there any federal or uniform provincial enumeration of retail gasoline outlets. Figure 5: Canadian Retail Outlet Population .2% Asphalt/Coke 4.9% PetroChem Feedstocks 5.7% Light/Heavy FuelOils 14.

and usually owns the brand name seen at the retail outlet. who holds initial title to the refined petroleum as it leaves the rack point. to about 16. exist between retail dealers and their suppliers. who manages the day-to-day operations at the retail outlet. Several possible relationships. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. and all inventory and revenues belong to the supplier. The supplier. and the dealer. controls the setting of the pump price.000 outlets in 1989. using Octane counts only) is roughly equivalent to population densities. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . or modes.The estimated number of retail outlets in Canada has declined from 22. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. Distribution of these outlets by province (Figure 6.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. as owner of the product. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.500 in 1995. and this is of some importance with respect to the matter of prices and competition in this sector. as one might expect. The principal dealer and attendants are salaried employees of the supplier. the retail outlet is owned and operated entirely by the product supplier.

supplier salary from supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. based on pump sales volume. and pays them from his commission revenue. Control of Pump Price Dealer Compensation supplier a commission from the supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. an employee of the supplier supplier supplier typically the dealer.sub-component margins . The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. Since the supplier owns the petroleum product at this type of outlet. the outlet facilities and petroleum inventory is owned by the supplier. usually based on cents per litre of petroleum sales. The dealer in turn hires attendants.the entire gross product margin accrues to the brand supplier. The “dealer” is in essence. who pays all outlet operating costs. but the outlet operator (“dealer”) is compensated by a commission payment. the supplier retains control of the retail pump price.

who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. less the Dealer (wholesale) Price charged by the brand supplier. MJ ERVIN & ASSOCIATES 27 . can vary considerably from one supplier to another.product from the supplier at a “Dealer Wholesale” price. since it is predicated on contractual arrangements between the dealer and the supplier. unlike rack or pump prices. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. and means of compensation supplier. and has control over the retail pump price. not the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. the retail facilities are owned by the dealer. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The margin between these two prices is the dealer’s gross revenue. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and sells at the posted pump price. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and sells at the posted pump price. This Dealer Price. The dealer pays most or all of the expenses associated with operating the outlet. dealer-established retail price. This dealer margin is defined as the pump price (ex-tax). The margin between these two prices is the dealer’s gross revenue.

Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. and fully two-thirds operate as lessees or independents. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. MJ ERVIN & ASSOCIATES 28 . Petro-Canada. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. during a price war) as previously described. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. or Imperial Oil). While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. The remainder represent one of over 50 different marketer organizations. virtually none of the major integrated outlets are company operated. In addition. who themselves establish pump prices.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. some general figures are mentioned here. 1 Unless the dealer is under a price support arrangement (for instance. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace.

In fact. Figure 8 depicts the Canadian representation of several key ancillary services. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . to over five million litres in major markets such as Toronto. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Improved outlet revenue from ancillary operations has caused. Most ancillary services are operated by the dealer/lessee. feature both a large-area convenience food store and a modern car wash facility. In effect. Canadian throughputs have dramatically improved in the past several years . more fully described in part C. has had a profound effect on the retail gasoline marketing sector. ancillary service has had the consequence of subsidizing the pump price of gasoline. These improved outlet throughputs have provided for improved petroleum revenue potential. Based on a sampling of outlets surveyed in this study. Many outlets have more than one ancillary offering: many “flagship” outlets for example.5 million litres.While an average outlet throughput may be in the order of 2.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. which in part has led to a reduction in retail product margins. these study findings show that this can vary widely from market to market. reduced petroleum margins. average annual throughputs ranged from under 1 million litres in smaller population centres. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. and is a result of.

mainly using Canada average values. as can be seen in part D of this study. This shows that pump prices have increased in nominal terms. Since rising prices are common to most consumer goods and services. particularly around 1990. prices are for regular unleaded (RUL) gasoline. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. and with which the reader should be familiar. an examination of the specific historical record of gasoline prices is useful. Since 1 Data is not regularly collected on smaller markets. As such. including smaller markets. would be somewhat higher. Regional and market-to-market comparisons are presented in greater detail in part D. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. This part examines broad trends in several areas. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. An “all markets” average. MJ ERVIN & ASSOCIATES 30 . when the Persian Gulf War caused crude prices to increase significantly. many utilize terms which are explained in part A. the “Canada average” price reflects an average of urban markets only1.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. While some of the presented findings are selfexplanatory. using a Canada 10city weighted (by provincial demand) average. Unless noted.

In constant dollars.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. as in Figure 10. rack price.1990. ex-tax equivalent prices. Figure 10: CPI Index Comparison . Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. When compared to other consumer goods. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. It also depicts the associated margins. nominal pump prices decreased. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. When pump prices are reduced by the amount of tax content. as defined in part A of this study. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. and relative crude cost. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. MJ ERVIN & ASSOCIATES 31 .

which are defined by the price points. Figure 12 shows that industry margins have not been constant over time. that is. it simply passes on a fixed cost margin to determine the “correct” pump price. are principally a reflection of changes in the underlying price of crude oil. the downstream industry operates on a “cost-plus” basis. If. MJ ERVIN & ASSOCIATES 32 . This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. which in turn. and have risen slightly since 1994. Margin History While Figure 11 provides an indication of key price trends. as shown in Figure 12. and in fact have displayed a declining trend over the past six years. nor do rack prices exactly follow crude costs. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. and the rise in the tax content. the presence of these additional market factors have operated to the benefit of consumers. as the next section shows. as might be suggested. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. It is important to state that pump price changes do not occur in exact lock-step with rack prices. it is also useful to examine the behavior of margins. due to additional market factors which affect pump and rack prices at any given point in time. then one might expect margins to be quite constant over time.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. In fact. as Figure 11 shows.

This shows that on a monthly basis. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. The decline in refiner and marketing margins has both resulted in. the actual fluctuation is much more pronounced than shown. not weekly or daily data. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. MJ ERVIN & ASSOCIATES 33 . including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. which have both shown a consistent decline throughout the period 1991 to 1996. compared to the Canadian average. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . and has been a result of. this upward trend is not attributable to “downstream” refiner or marketing sector margins. 1 In fact.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the gross marketing margin can fluctuate quite significantly1. Finding 13: From 1991 to 1996. In particular. since the chart is based on monthly averages. as local competitive factors act to self-regulate pump prices. A more thorough discussion of specific market factors for these and other centres appears in part D.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. several factors.crude) 5¢ Marketing Margin (retail .

resulting in significantly higher Canadian gasoline prices. This shows that. with and without tax. On an ex-tax basis. US Price History The retail gasoline tax structure in Canada is vastly different than the US. or even less than. is presented in Figure 14. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 .Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. for several years. A comparison of Canadian and US regular gasoline pump prices.Figure 13: Monthly Gross Marketing Margins. if not all of the difference in pump prices between Canada and the US. although Canadian pump prices in urban markets are clearly higher than in the US. this is wholly attributable to the difference in taxation. US pump prices. This difference accounts for most. Canadian pump prices have been roughly equal to.

Figure 15 compares these values for selected Canadian and US centres over a period of several years. This is no longer the case however. when compared on an ex-tax basis. Canadian outlet throughputs (although likely still less than those of the US). as a result of outlet closures (see Figure 5. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. which is reflected in US average pump prices. and moving up or down more or less in unison. From this it can be seen that Canadian and US rack prices. largely as a result of two factors: • Canadian marketing margins have decreased in this period. This would be a useful area for further research. • Although this study shows that on an ex-tax basis. RFG has not been introduced to Canadian markets. trading at any given time within a relatively narrow (about 2 cents per litre) range. have improved considerably. behave in a very similar fashion. Prior to 1994. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . both a cause and an effect of improved throughputs and ancillary revenues as previously described.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Canadian ex-tax pump prices were historically somewhat higher than in the US. page 24) and somewhat increased demand. While these trends have also occurred in the US. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts.

and as would be expected in any commodities market under these conditions. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.100.000 2.500.300.500. Price History Figure 16 shows the history of Canadian gasoline demand.900. Pump Price (nominal ¢/litre) 3.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. or sales. Simply put. Gasoline price exhibits a similar. Yet in the latter half of each year.000 24¢ 1. and prices tend to fall.100. Gasoline demand exhibits a very regular seasonal pattern. conditions begin to favour a “seller’s market”. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.900. the price tends to be bid upwards. not only in a given market. albeit less distinct pattern. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .700. As non-refiner marketers attempt to secure a supply of this diminishing inventory. as demand ebbs and inventory improves. of motor gasolines from 1991 to 1996. rising and falling closely in step with demand. Figure 16: Monthly Demand vs.000 1.000 2. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. or indeed anywhere. compared to average ex-tax regular gasoline pump price for the same period.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 2.000 2. a “buyers market” develops. Demand vs.000 34¢ 2.000 1. but in fact across the North American continent (US demand follows a similar pattern).700. increasing significantly every spring. and falling in the latter half of each year.

while average ex-tax pump price declined by 14% (since 1994.3%. gasoline prices have not followed the traditional model. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. This is of course. a feature of most marketregulated commerce. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. their related product costs and margins. and product taxes which add to the consumer price of gasoline. so do prices. MJ ERVIN & ASSOCIATES 37 . This part of the study presented a number of historical views of retail gasoline prices. as evidenced by declining industry margins. in that prices have fallen. while world crude prices and Canadian taxes have generally increased over the past several years. has operated in a highly competitive environment. demand rose approximately 8. which ensures a competitive product price for buyer and seller alike. the downstream petroleum industry. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. Figure 16 shows that from 1991 to 1995. despite a rise in demand. On a long-term basis however. All of the findings suggest that. the essence of a free market economy. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. The traditional supply-demand model predicts that when demand rises. pump prices have increased due to a significant rise in crude costs in this period).Whether in the spring or the fall. competing to meet their own needs. which consists of the refiners and marketers of gasoline and other petroleum products.

which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. and pump prices alone provide very little opportunity for “comparability”. freight. is useful in providing broad overviews of industry price and margin trends. • Methodology Selection of Markets A number of markets were selected for the study. margins and related implications for market competitiveness than can simply be provided by existing public-domain data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. etc. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. A number of factors such as taxes. outlet costs. play a role in a market’s pump price.. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. ancillary revenues. there is no regular monitoring of pump prices in smaller centres. MJ ERVIN & ASSOCIATES 38 . outlet volumes. and a more detailed examination of price. Nineteen markets were therefore adopted for the study (Table 3). namely product margin. although one was subsequently dropped due to insufficient submitted data. These “outside factors” tend to obscure the more relevant aspect of pump price. and in order to provide insights into the range of competitive dynamics that may exist.

but a number of variables. Five companies responded to this request: Imperial Oil. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. To this end. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations.and consequently competitiveness . retail pump prices . In all. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. MJ ERVIN & ASSOCIATES 39 . retail outlet and brand representation.0001.. Shell Canada. Furthermore. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. these organizations provided market-level data on freight costs.Each market was classified according to regional affiliation (BC/Prairie. Petro-Canada.000. To examine the competitiveness of the marketing. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. the gross marketing 1 Although White Rock is clearly not a major centre by itself. price history data not available through public sources.are influenced not by one. 2 Depending upon the outlet mode. Suncor Inc. it was essential to obtain data not normally available through existing public sources. Ontario. and for smaller markets. Process Overview As illustrated in part A. In addition. and Canadian Tire Petroleum. the gross marketing margin must be examined in isolation from those other variables. or “rack to retail” sector. and Group B markets less than 500.

Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. in addition to operating cost and ancillary revenue data gathered in the study1. including some smaller centres. by product grade. The gross product margin thus serves as an interim basis for comparing study markets. 2. rack price. From participant company supplied data. to arrive at “blended” values2. Where applicable. average pump prices are higher than actual average regular gasoline prices. 3. rack price. For each market. Group B (smaller market) and 19-market study averages. MJ ERVIN & ASSOCIATES 40 . to derive the 1995 average gross product margin for each of the study markets. a broad representation of markets was possible. and the final “rationalized” gross product margin was determined for each market. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. The variables of tax content. Using the derived gross product margins and volumes for each market. and freight. and freight were successively removed from the pump price. as the “blended” price includes other product grades. a market-by-market profile of outlet income is presented. tax content. 2 Accordingly. Finally. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. 1995 average values were determined for pump price. This allows for an accurate determination of net outlet revenue. Where differences in gross product margin might still exist. these were weighted by volume. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. 1 Although outlet cost and ancillary revenue data was not available for all markets. weighted by sales demand.margin is stripped of its freight component. average outlet annual throughput was determined for each market. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban).

Unlike retail pump prices however. Supplier Overhead costs. and therefore where assumptions were made. The derived weighted average values of pump price. or consolidated net incomes. A dollar-per-outlet estimate of these elements was made. Also.. these 19 markets represent a combined population base of 8. accurate comparisons are possible. This variation is constant across all nineteen markets however. MJ ERVIN & ASSOCIATES 41 . Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. 5. represent a broad range of markets. and from one brand to another. etc. and supplier profit. From participant company data. many wholesale petroleum purchases are made at less than the “posted” rack price. and gross product margins are therefore likely to be understated. a recognized source of data on world crude oil and petroleum markets and prices. including relatively smaller ones such as Sioux Lookout or Gaspé. as described on page 10. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. average revenues from ancillary services were added. it is important to understand that the use of rack price in this analysis has certain implications. While clear. perhaps by 1 to 2 cents per litre. Bloomberg rack price values were used as the assumed wholesale price. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. These differentials do vary from one market to another. 6. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. and accordingly represent a broad spectrum of consumers and marketers. and outlet operating costs were deducted from total revenue.. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income.7 million.. Interpretation of Data In some smaller centres.. marketing margin. grade differentials were based on known differentials of nearby markets. also considering that RUL constitutes the majority of product. but they are relatively minor. freight. This value was then applied to the gross product margin to determine average outlet petroleum revenue. the effect on the “blended price” is small. When these margins are applied to outlet throughputs as in step 4 above.to determine average consolidated net revenue per outlet. Wholesale refined product prices used in this study are therefore likely to be overstated. objective data exist for both of these values. In referring to marketing margins. encompassing a significant portion of the entire Canadian market. petroleum revenues. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. ..4. so that on a cents-per-litre basis. 7. product margins.

MJ ERVIN & ASSOCIATES 42 . A 6. The first of these variables to be examined is tax. accurate.64 cents per litre in pump price. but a variance of only 12. and based on objective. The data shows a statistical pump price variance of over 17 cents per litre within this study group. there is little to suggest why such a high variance exists. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. while lower prices tended to prevail in major centres. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Tax Figure 19 shows posted pump prices for the study markets. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. independently gathered data. The study data suggests that variations in tax rates account for a significant part of pump price differences.8 cent difference in pump price 1 See footnote at Appendix II.Rack prices used in this study are nevertheless market-driven. broken into tax and extax components.38 cents per litre in ex-tax pump price. The data also shows that typically. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. higher priced markets are associated with smaller population centres. table J for an explanation of how variance is derived. The 19-market study group exhibited a statistical variance1 of 17.

tax. was less than three cents. In all study markets. as described in part A.less than one-half cent per litre. taxes were a significant element of pump price. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.while all markets are subject to the same rate of federal excise tax and GST1. when examined on an ex-tax basis. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. MJ ERVIN & ASSOCIATES 43 . additional elements of the revenue stream must be further isolated.between Calgary and Vancouver for example. GST content can vary by market. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. thus providing a better basis for comparison. namely the upstream industry and refiner sector. but the variance is minimal . As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. provincial tax rates can vary greatly. Figure 19: Pump Price . This eliminates any effect that tax variability may have. or when examining historical price trends. Montreal). Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28.75 cents per litre (Vancouver. 1 Due to pump price differences. The data shows that taxation between markets within the same province varies little. while taxation between provinces is more pronounced . accounting for roughly half of the average retail price.

if a clear understanding is to be achieved. the rack price is equivalent to the upstream margin plus the refiner’s margin. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie.assuming transport costs did not outweigh the price difference. but ultimately. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. in the case of Thompson). rack and pump prices. one region cannot maintain rack prices at a higher level than another. are clearly delineated by market-driven crude. the rack price is set at the rack point (Winnipeg. MJ ERVIN & ASSOCIATES Cents per litre 44 . and therefore are best analyzed separately. Freight costs are additional. rack price) and gross marketing margin elements. reflecting the reality that at the rack level of competition. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. differ little from those of major centres.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. This is due to the fact that for any market. as this would cause rack buyers to bring product in from the lower-priced region . To address this. as is examined below. it should be restated that each of these sectors. reflecting some differences in refinery crude acquisition costs. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. Furthermore. When rack price is deducted from the ex-tax pump price. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. and their respective margins. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. the validity of analyzing gross marketing margins in isolation might be raised.

in fact. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Figure 21 shows a study market comparison of gross marketing margins. generally smaller markets. and therefore a significant pump price factor. resulting in comparative gross product margins. remote population centres. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. with their component freight costs.16 cents per litre (gross marketing margin) to 7. particularly in comparisons of major urban markets to small. this freight cost is almost negligible. Before using this as an analytical tool however. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. MJ ERVIN & ASSOCIATES 45 . For markets which are also established as rack points.49 cents per litre (gross product margin). It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.3 cents per litre. as low as 0. For other. Although freight operations are often an integral part of many petroleum marketing operations.0 cents per litre. one final outside variable must be isolated: that of product freight. it is essentially a “non-core” business. the data shows that freight is often a significant part of the gross marketing margin. it is therefore important to eliminate the freight variable from the gross marketing margin. To provide a comparative view of the marketing dynamics within the study group. Two of the study markets had freight costs in excess of 3.

it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. Bloomberg rack price values were used as the assumed wholesale price. was the highest of the study group.42 cents per litre. In referring to marketing margins.5 cents).5 cents per litre average Gross Product Margin cited in Part B.06 cents per litre. while Group B markets averaged 7. or between any two regions. while Toronto. For all study markets. 1995 gross product margin averaged 5.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. was the lowest.a variance of only 2. Group A (larger population) markets averaged 5.68 cents per litre.22 cents per litre Smaller markets showed a wider variance in gross product margin . as the 3. to the resultant retail gross product margin . at 3. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. Gaspé. A 7. The study revealed that: • • Retail gross product margins differ very little between major urban markets . at 14. or consolidated net incomes.95 cents per litre. product margins.5 cent variance in gross product margin is still significant however. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. petroleum revenues.the gross revenue available to the petroleum marketing sector for its operations. MJ ERVIN & ASSOCIATES 46 .17 cents per litre.5 cent per litre average relates to regular gasoline in major markets.68 cents per litre1. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.6.6 cents) to the variance in their component gross product margins (7.

a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000.000.000 litres per year (Toronto).000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. sold significantly less than 5 million litres of petroleum per year.000 5.000.2 cents per litre in Gaspé. an examination of related outlet throughput volumes is necessary. it would likely be so unprofitable as to be un-viable. once isolating retail gross product margin from all of the “outside” pump price factors. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000 4. A wide range of volume performance is evident.000.1 cents per litre in Toronto.14.000 Litres 3.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. if any retail gasoline outlet located in the Toronto area for example. a wide range of variability still exists between markets in the study group . 3. If these two factors are related to each other as they are in Figure 24. Figure 23: Average Annual Throughput per Outlet 6. vs. Indeed.000 litres per year (Sioux Lookout) to over 5. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 1.000.000. ranging from under 700.differences between markets. for example.000 2.

000.000. while those with high Gross Product Margins tend to have low outlet throughputs. Smaller markets perform as competitively as larger centres.7 million respectively.6634Ln(x) + 76.95 cents). As most outlet operating cost are fixed in nature . the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 5.000. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. On average however.000.000 Volume (litres) 4. they remain essentially the same regardless of volume changes . all market groups (BC/Prairie. Although MJ ERVIN & ASSOCIATES 48 .000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.962 R2 = 0.4 million litres annually.000.000 6.that is.6624 1.000. it follows that higher gross product margins will be the consequence. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. the Group A market outlets had roughly 50% more throughput than Group B outlets .42 cents) than smaller (Group B) population centres (7. With few exceptions. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. compared to 2. Ontario. Regionally.000 3. If all outlets in a given market experience generally low throughputs. not of poor competition. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.Figure 24: Outlet Volume vs. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000 2.

and supplier MJ ERVIN & ASSOCIATES 49 .000 5. product cost. These additional factors clearly have an effect on the relative competitiveness of retail markets. which for the study group. in addition to petroleum sales. however. and the resultant consolidated net revenue.000. and must be examined. is only a measure of petroleum revenue per litre.000 3.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences.000. which.000. competitiveness occurs between retail outlets. Consolidated Net Revenue per Outlet To create a complete.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise).000 4. and incur many expenses in the course of their commerce. and ultimately shows that very little difference in competitiveness exists between any two markets.000 2. less outlet costs.000. Gross product margin. In reality.000 6. and auto service. as described below. Ancillary revenues are those derived from non-petroleum sales sources.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. It represents the residual revenue which is available to the dealer and to the supplier. averaged $69.000. supplier overhead costs. Figure 25: Outlet / Volume Relationship . supplement their incomes with other revenues.the revenue available for dealer income. such as convenience stores.000. outlet-based view of retail markets. while operating costs are those costs which are directly incurred in the operation of the retail facility. this is likely due to the higher incidence of Group B study markets within this region. car wash. Figure 26 summarizes total outlet petroleum sales.716 . ancillary sales. two additional factors are introduced: ancillary revenue and outlet operating costs.

In effect. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. An examination of these component elements reveals a significant finding: that for most markets. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. causing the weighted average for Quebec / Atlantic to be depressed).000) $(200. Costs.000) $(150. Figure 26: Outlet Revenues.000) $(300.000 per year respectively . $60. A discussion of the ultimate distribution of this revenue is useful.000) $(250. these ancillary operations contributed to a lower product margin and consequently. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 $250.000 $50. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.profits. Most markets showed relatively similar net revenues (see Appendix II.000) $(350.000 $100.000) $(100.000 vs. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. as explained below.Group B outlets were not as profitable as these revenue values might suggest. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000 $200. Finding 19: Based on published rack prices. reduced pump prices.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . which reflects his investment in the outlet. Income BC/PR $300.000 $150. and his personal labour investment. Table K).$154. MJ ERVIN & ASSOCIATES 50 . As described above.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

MJ ERVIN & ASSOCIATES

51

Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

MJ ERVIN & ASSOCIATES

52

Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

MJ ERVIN & ASSOCIATES

53

38 ¢ 7. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Vancouver collects a 4 cent per litre municipal tax.ex tax Canada Average .60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. while average throughput ranked 4th. contributing to a higher than average pump price.000 1. and also has local refining capacity. and with access to wholesale product by several means. Vancouver is also a terminal for a refined products pipeline from Edmonton. Influence of other markets: Although relatively close to the US border. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.Vancouver population # of brands # of outlets outlets per 10. net outlet revenues were less than those of other major centres. a 60. Overall. this market has access to numerous refiners along the Pacific coast through marine supply.745 18 446 2. ranking 11th. Low consolidated net revenues may have contributed to the higher margin.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. The somewhat high margin placed this market slightly above. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Geographic / Supply / Freight cost considerations: As a port city. but well within a cluster of markets with similar throughputs. as described below.000 barrel per day plant located in the greater Vancouver area.98 ¢ 0.658.542. Figure 28: Vancouver .Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . This may explain the somewhat elevated gross product margin in this market.968 litres 7. Vancouver provides several perspectives into retail marketing.

98 ¢ 0. MJ ERVIN & ASSOCIATES 55 . Geographic / Supply / Freight cost considerations:. prices in this market have historically mirrored those of Vancouver.604. White Rock is essentially part of a major market due to its proximity to Vancouver. Vancouver. Average outlet throughputs were relatively high. prices.315 4 8 4. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. the study data found little to suggest a material effect upon representation. due to its proximity to one. the White Rock retail gasoline market displayed the same attributes as a major urban market.White Rock population # of brands # of outlets outlets per 10.000 16. This market is close to its usual rack point. or competitive dynamics. Freight costs were accordingly low compared to other small markets in this study.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. adjacent to the United States border. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.45 ¢ 7. This suggests that. thus providing some unique characteristics for the market study. Price history / Taxation: Although no specific data is available.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. In all respects. and retail gross product margin was less than that of markets with a similar population base. at least in this market. Influence of other markets: Although this market is a border-crossing community. this market is subject to a 4 cent per litre municipal tax. but less than most markets with a small population base. gasoline “cross-border shopping” is less pronounced than might be expected. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.630 litres 7. White Rock’s margin was typical of markets with similar outlet throughputs. This is likely due to the fact that unlike many smaller markets. Like Vancouver. Despite its relatively small size.

Calgary population # of brands # of outlets outlets per 10.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Influence of other markets: Calgary is fairly remote from US and other major markets. indicative of a strong competitive climate. Rack-to-outlet freight costs are among the lowest in the study group. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Price history / Taxation: As the figure below shows.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Indeed.47 ¢ 0.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .24 ¢ 6. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Some smaller markets in the vicinity have occasionally priced below Calgary.827. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Other considerations: Of the markets studied.675 27 313 4.719 litres 6. Consolidated net revenue: was typical of other major markets in the study group. Product is usually sourced from Edmonton refineries via pipeline. Calgary had the third highest number of retail brands. pump prices in this market have historically been well below the Canadian 10-city average. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. creating some competitive pressures (see Nanton). Figure 29: Calgary . which was one reason for selecting Calgary as a study market.ex tax Canada Average . Calgary is of sufficient size to support a viable rack market.000 710. Calgary pump prices are very close to the Canadian average.

Since 1993. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.50 ¢ 0. it is likely that this reflected a surplus of wholesale inventory within the local market or region.180 15 86 4. Figure 30: Regina . this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Regina was of some interest as a study market. which are among the highest in Canada.Regina population # of brands # of outlets outlets per 10. and a history of volatile pump prices. Consolidated net revenue: was typical of other similar markets.089. and this market is now more typical of other large population centres. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Although no supporting data is available. this market is removed from other significant markets. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.794 litres 7.21 ¢ 7. margins and throughputs were typical of other markets with a similar population base. price volatility has eased. This is partly due to provincial taxation levels.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Influence of other markets: Like Calgary.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Ex-tax prices are also above average.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .ex tax Canada Average . Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Since then. supply/demand is likely more balanced. and is therefore a recognized rack pricing point.000 179. and therefore experiences no particular influences from any other major market.

22 ¢ 7.000 616. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. prices have tended to stay somewhat above the Canadian average. it is an established rack price point. and has remained very close to the Canadian 10-city average. this market is removed from other significant markets. although there is no study data to support this. This may reflect a lower than average Consolidated Net Income.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.790 17 261 4.06 ¢ 0.265. possibly due to modest ancillary revenue. Influence of other markets: Like Calgary.ex tax Canada Average . although.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Price history / Taxation: In the early 1990’s this market experienced some price war activity.Winnipeg population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. this market has exhibited relatively stable pricing. Since then. Figure 31: Winnipeg . like most markets of this population density.217 litres 8. though somewhat higher than average ex-tax pump prices. probably related to a regional surplus of wholesale inventory (see Regina). On an ex-tax basis. Consolidated net revenue: No ancillary or outlet cost data was available for this market.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. and therefore experiences no particular influences from any other major market.

due to its proximity to one. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. more isolated small-town markets.91 ¢ 0.000 1.585 4 5 31. as Figure 24 shows. Influence of other markets:. In this respect. and perhaps healthy ancillary sales associated with highway traffic. Unlike many of the smaller markets in this study group. Nanton was the smallest market in terms of population. Consolidated net revenue: No Ancillary or cost data was available. Nanton appeared to benchmark its pump prices to those of Calgary. MJ ERVIN & ASSOCIATES 59 . placing Nanton well below the expected margin. Despite its small size. would have an offsetting effect. Nanton was perhaps the least viable market in the study group. situated on a major North-South highway to the United States Among the study group. Average outlet throughputs were relatively low.and a low average outlet throughput. while others experience consistently high prices.far in excess of what would be expected of a community with a population of 1.000 litres 5. this market has a relatively low freight overhead. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. a feature not available to other. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume.600. While these conditions would normally result in a high gross product margin. the Nanton retail gasoline market displayed the same price attributes as a major urban market.Nanton. in order to maintain a share of the considerable potential sales revenue that passes through this market. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .41 ¢ 5.the highest of the entire group . Nanton had a high number of per capita outlets . Price history / Taxation: In order to attract market share beyond simply the local population. Nanton has traditionally priced either at or below Calgary. Nanton had the second lowest gross product margin of the study group. although not as low as expected. Alberta population # of brands # of outlets outlets per 10. in terms of expected petroleum revenues. Due to its highway location and its proximity to Calgary.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the retail gasoline market in Nanton was not restricted to the local population. it is likely that low operating costs.071. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.

623 litres 12. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. MJ ERVIN & ASSOCIATES 60 . and in fact fell into a tight cluster of four other study markets. isolated markets. Alberta population # of brands # of outlets outlets per 10. nor is it influenced by. other markets. In contrast to Nanton.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. this market has little or no influence upon. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Peace River has among the highest freight cost in the study group. they were comparable to other markets with similar average throughputs.6 cents per litre. high pump prices. Price history / Taxation: Peace River is typical of small.Peace River. isolated markets. though fairly typical of many smaller. Peace River also experiences high freight costs. further adding to overall high pump prices. and due to its isolated locale in northern Alberta. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.45 ¢ 1. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.157.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Geographic / Supply / Freight cost considerations: At 1. its normal rack point.715 6 8 11. Supply is via tanker truck from Edmonton. and was accordingly chosen as a study market. experiencing relatively high gross product margin and consequently.000 6.6 ¢ 10.

MJ ERVIN & ASSOCIATES 61 . Other considerations: Like other small markets. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. These factors resulted in relatively strong per-outlet net revenues. other markets. isolated markets.1 ¢ 3. they were comparable to other markets with similar average throughputs.014.975 5 6 4. and reduced pump prices. Supply is via tanker truck from Winnipeg.Thompson. the community of Thompson clearly falls into the category of a small. resulting in per-outlet petroleum revenues which were quite typical of many markets. a significant portion of which would likely be distributed towards supplier overhead costs. It also experienced high freight costs.520 litres 14. Thompson is faced with the dilemma. and in fact fell into a tight cluster of four other study markets. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. experiencing relatively high gross product margin and consequently. Consolidated net revenue: Low outlet throughputs were offset by higher margins. this market has little or no influence upon. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. outlet costs were also modest typical of most smaller markets.000 14.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.02 cents per litre. This however. remote market. Price history / Taxation: Thompson was typical of small. Geographic / Supply / Freight cost considerations: At 3. thereby creating the potential for narrower margins. Thompson is among the highest freight costs in the study group. Although outlets in Thompson appear to be as competitive as those of any other study market.02 ¢ 11. high pump prices. Manitoba population # of brands # of outlets outlets per 10. Although ancillary revenues were the smallest of the study group. and due to its isolated locale in northern Manitoba. its usual rack point. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. further adding to overall high pump prices.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. nor is it influenced by. Influence of other markets: Since is not located on a major inter-uban thoroughfare.

extax Toronto Posted Price . an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. In addition.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . With an average “blended” gross product margin of only 3. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. and a resultant low consolidated net revenue. this market ranked first in a number of measures: lowest gross product margin.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. stretching from Pickering to Buffalo.Toronto population # of brands # of outlets outlets per 10.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. New York. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.3 ¢ 3. Figure 32: Toronto .000 2. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.275. Within this region are thousands of retail outlets. it had the second highest brand variety of the study group. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. It consequently has a low freight component. this market was consistently less than the 10-city average. Consolidated net revenue: Although no study data was available for this market. as evidenced by an exceptionally low gross product margin.06 cents per litre.098.36 ¢ 0. and is also relatively close to wholesale supply sources in the US. Influence of other markets: This market is continuously linked with several other major retail markets. On an ex-tax basis however. and first in average throughput per outlet. it is likely that outlet ancillary revenues are among the highest in the country. similar to that of Montreal.478 litres 3. thus there exists a climate of robust competition. This is likely offset by high operating costs. least number of outlets per capita.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .775 30 546 2.

08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.145 19 209 3. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.ex tax Canada Average .29 ¢ 5. freight costs within this market were quite low. in fact.004. Figure 33: Ottawa . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. several smaller.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . some of which have on occasion priced below Ottawa (see Nanton and Calgary). Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. Influence of other markets: Although Ottawa is the only major market in the immediate area. and close to the Canadian 10-city average. Other considerations: While pump prices in this market were somewhat higher than in Toronto. exhibiting all of the characteristics of robust competition. Consolidated net revenue: was low.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.948 litres 5.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .Ottawa population # of brands # of outlets outlets per 10. ancillary revenue was slightly lower than average. Although petroleum revenues were typical of major markets. slightly lower that expected. and operating costs were higher than most. rural markets co-exist in this area.97 ¢ 0.000 678.

a product of relatively strong net petroleum revenues combined with lower than average operating costs. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.22 ¢ 7.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. and between 5 to 8 cent per litre in gross product margin. a consequence of the transport distance from the rack point. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.Sault Ste Marie population # of brands # of outlets outlets per 10.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.550 litres 8. MJ ERVIN & ASSOCIATES 64 .465.73 ¢ 1. Freight costs are therefore high.475 10 24 2. average throughputs were modest. Pump prices in this market were thus typical of any market with similar throughput characteristics. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Influence of other markets: This market is close to a US border market. This would suggest that a significant market share is being lost across the US border. yet with some potential for cross-border retail competition. Sault Ste Marie is a sizable market. somewhat isolated. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.000 81. partly due to higher freight costs. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). and accordingly. this Canadian market has some difficulty in remaining both competitive and viable.

310 3 3 9. An average outlet in Sioux Lookout pumped only 694. Freight costs are therefore high.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Influence of other markets: This is clearly an isolated market.96 ¢ 3.Sioux Lookout population # of brands # of outlets outlets per 10. despite its high prices. although high. in fact the second highest in the study group. It therefore presents some unique characteristics for the market study. and outlet throughputs of any market studied.000 3. brands. and had the least number of outlets. This is a major factor in the high cost of gasoline in this market. Sioux Lookout is well-removed from any major highway. This would suggest that. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. this market experiences a high degree of price competition. Consolidated net revenue: No data was available for this market. MJ ERVIN & ASSOCIATES 65 . with little or no influence from other retail gasoline markets. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.066 litres 14. largely due to higher freight costs.2 ¢ 11. was much less than expected for a market of this size. one-seventh the average throughput in Toronto. so that virtually all sales volume represents local demand only.006 litres in 1995.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694.

43 ¢ 0.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Influence of other markets: Like Toronto. a function of a competitive rack market and an excess of retail outlets competing for market share. This. this market interacts with several other markets in the region.144 litres 5. It therefore represents a highly competitive rack market.870 32 866 4. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.5 cents per litre was introduced into the Montreal area). On an ex-tax basis however.394.000 1. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. combined with low petroleum revenues and high operating costs. Montreal was included in the selected market study.Montreal population # of brands # of outlets outlets per 10. pump prices in Montreal have generally been at or below the 10-city average for major markets.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . Figure 34: Montreal . pump prices in this market have a tendency to be volatile. placed Montreal lowest of all study markets in terms of consolidated net revenue.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . this market ranks first of the study group in terms of brand variety. with resultant low average outlet throughputs. With 32 competing brands. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. and is also relatively close to wholesale supply sources in the US.775.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. Price history / Taxation: As the figure shows. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.extax Montreal Posted Price . an additional tax of 1. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.3 ¢ 5. thus promoting a competitive climate.

Margin/Throughput relationship (Figure 24): Outlet throughputs.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.605 14 97 8. Nevertheless. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. In the case of Chicoutimi. Freight costs are therefore somewhat high. Chicoutimi is normally supplied from the Quebec city rack.250. for example). but as the figure shows. Consolidated net revenue: was average among the study group.289 litres 12. this market has little potential as a rack market.28 ¢ 1. MJ ERVIN & ASSOCIATES 67 . Gross product margin was accordingly high. although low.08 ¢ 11. within a cluster of other markets with similar attributes. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.000 120. were quite typical of markets with similar populations. by tank truck. a partial factor in the high cost of gasoline in this market. yet is geographically quite isolated.Chicoutimi population # of brands # of outlets outlets per 10. this amounted to a reduction of 5.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.75 cents per litre. but is quite isolated from any other markets. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. both pump and ex-tax prices in this market were higher than average.

Nevertheless. this margin was only slightly higher than expected for a market with these throughput attributes. in the case. both pump and extax prices in this market were higher than average. Gaspé is well-removed from any major highway. a key factor contributing to its 14.50 ¢ 3.33 ¢ 14. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. so that virtually all sales volume represents local demand only. a product of high freight costs and gross product margins. amounting to a reduction of 5. in fact the highest in the study group.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Although operating costs are likely to be low in a small market like Gaspé.000 16.Gaspé population # of brands # of outlets outlets per 10.900 litres 17.400 6 13 4.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. with little or no influence from other retail gasoline markets. Influence of other markets: This is clearly an isolated market.17 gross product margin the highest of the study group. Consolidated net revenue: No data was available for this market. Freight costs are therefore high. Nevertheless.75 cents per litre. by tank truck. located at a considerable distance from its rack source of supply. ancillary revenues would likely be modest. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. This is a major factor in the high cost of gasoline in this market. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. MJ ERVIN & ASSOCIATES 68 .

this market fell within the expected range of gross product margins as a function of outlet throughput. retail pump prices are ultimately a reflection of rack prices.095. and is capable of shipping and receiving wholesale product through marine facilities.ex tax Canada Average . ex-tax prices were relatively high.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. it is an established rack point. the Saint John retail market is relatively isolated from other retail markets of any significance. Accordingly. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Price history / Taxation: Historically. Nevertheless.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. and therefore. freight costs in this market are low. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Saint John presents some unique characteristics for the market study.970 9 56 7. with or without a local refinery. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Consolidated net revenue: was average for the study group. resulting in lower than expected average outlet throughputs. Since provincial taxes are among the lowest in the country.000 74.79 ¢ 0. posted pump prices in the Saint John market have closely followed the 10-city average. which for Saint John. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Average gross product margin was consequently high.Saint John NB population # of brands # of outlets outlets per 10.27 ¢ 9.extax MJ ERVIN & ASSOCIATES 69 . do not differ markedly from any other rack point in the study group.694 litres 9. reflected in the high ex-tax pump price. In fact. Figure 35: Saint John NB .

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

70

Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

71

Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

MJ ERVIN & ASSOCIATES

72

....... are principally a reflection of changes in the underlying price of crude oil. which ensures a competitive product price for buyer and seller alike.......................... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.. ............. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences...... the profitability of the 481 outlets studied appears only marginal....... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements................................................................................. ................ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs............. given the possibility of discounts from posted rack prices and potentially lower overhead costs.... ............. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. In effect........... the residual represented a net loss to the supplier. and likely a negative impact on consumers.............. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads................................................................. a feature of most market-regulated commerce. 50 Finding 20: For the 481 individual outlets studied.........................................................51 Finding 21: Based on published rack prices and the individual outlet data............. while those with high Gross Product Margins tend to have low outlet throughputs. particularly in comparisons of major urban markets to small.......................... 48 Finding 19: Based on published rack prices... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. 71 MJ ERVIN & ASSOCIATES 73 .......... these ancillary operations contributed to a lower product margin and consequently....................... ............................ 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.......... .......... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.................................. residuals for outlets not studied may be better............. 33 Finding 13: From 1991 to 1996..... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels..................................... .. when compared on an ex-tax basis....................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better............................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.................................... which in turn....... reduced pump prices.... remote population centres.......

Rack and pump prices are determined in competitive marketplaces. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). was observed (Finding 10). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. 2. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. is mistaken. In comparing several diverse markets. exhibited a diminishing trend (Finding 13). Canadian prices have been at or below US prices in recent years. price is but one of four competitiveness “tools” available to marketers (product. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. over the long term. the very margins within which this industry operates has. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. The study presents such a model. and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. 1. Although an objective measure of competitiveness is elusive. was shown to be strongly competitive: • A long-term decline in pump prices. when measured in constant and nominal dollars.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. This has not simply been a result of a decline in underlying raw materials costs. The Canadian retail petroleum products industry. As described in this study however. in comparing Canada average (city) pump prices to those of the United States. Virtually all of the competitiveness indicators examined in this study relate to price. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. On a national level. when taxes were excluded (Finding 14). The resultant margins. place. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). each with unique dynamics. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . by all objective measures available to this study.

refiner margins accounted for 5.3 cents or 9 percent (Finding 5). In applying such a model to the retail petroleum marketing industry. and are a predominant cause of inter-regional pump price differences (Finding 16). presents a competitive disadvantage to Canadian marketers. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. 3. and do. generally do not serve as competitiveness inhibitors. municipal levels of government. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). but even in such cases. but also rack prices and outlet performance. it is important to understand that. Taxation is a significant factor in the price of retail gasoline. Due to the localized nature of competition in the retail gasoline marketing sector. Dealers were shown to have a variety of relationships with their supplier. for example) were rationalized. well over half of all outlets in Canada operate as lessees or independents.even negative values. retail petroleum markets are considered local (municipal) in scope. particularly smaller ones. or even between Canadian markets with differing tax structures. The demonstrated exception to this is in markets directly adjacent to nearby US markets. these markets have managed to sustain a certain level of viability and competitiveness. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and accordingly. MJ ERVIN & ASSOCIATES 75 . an exercise that consumers are unlikely to engage in. and product margins accounted for 3. taxation as an element of public policy is an area worthy of additional research. and in some markets. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). crude costs accounted for roughly 34 percent (Finding 2). are thus a reflection of the state of product supply.5 cents. since this is the effective range of consumer choice. but given its magnitude. experienced higher than average pump prices. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. This implies that the competitive dynamics pertaining to these retail markets can. This would entail the tracking of not only pump price. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. While some markets. measured against the average outlet throughput for that market. and in some markets. provincial. when the “outside” factors (tax. vary considerably from one population centre to another. By contrast. The latter two can vary considerably from one market to another. demand and other competitive factors existing at the time. Petroleum product taxes are levied at the federal. rack price and freight cost. taxation differences between Canadian and US markets. or 6 percent (Finding 6) of the 1996 average regular pump price. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market.

constitute a small portion of the retail pump price. MJ ERVIN & ASSOCIATES 76 . Retail pump prices showed a corresponding seasonal pattern. The pump price/margin model shows that in 1996. which represent the majority of Canada’s population base. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. exhibited competitive traits typical of any of the study markets. showed a close relationship to underlying crude prices (Finding 11). is available to provide for all retail marketing operations including outlet costs. and more price-stable markets such as Sioux Lookout. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. second only to the United States. which in turn is the principal driver of ex-tax pump prices. Viewed from this perspective. predictable seasonal pattern. on a per litre basis. dealer income. which in turn. fluctuating prices are a strong competitiveness indicator (Finding 7). it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. a price-stable market. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. supplier costs and profitability. Demand for gasoline was shown to vary significantly according to the time of year. and a loss in the case of urban markets. Sioux Lookout. in a highly distinct.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. when examined on the margin-volume model. This margin represents gross revenue (after wholesale product and freight cost) which. Retail pump price changes showed a close relationship to underlying rack prices. the absence of price war activity does not imply a lack of competitiveness. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. While price wars are undoubtedly an indicator of competitiveness. reflecting consumer demand behavior (Finding 15). This consolidated outlet revenue. on the basis of price fluctuation alone. Retail gasoline marketing revenues. Pump price fluctuations can be an indicator of competition in the marketplace. 4. 5. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). when distributed these three ways (Finding 20). the Canadian retail marketing sector realized an average gross margin of 3. Rack prices were shown to not significantly differ between major centres. In fact. incorporated with ancillary revenues and outlet costs.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6).

Industry profitability is extremely sensitive to very small changes in pump price. both of which are beyond the direct influence of Canada’s oil companies. not price.6. but to increases in underlying rack prices. This trend has both resulted in. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. While these economics might appear to place this industry in a position of poor viability. and in turn. have caused. Nevertheless. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. several competitive strategies. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Also. assuming all other costs were unchanged. in the long term these fluctuations are likely more reflective of market restorations. Thus. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. and has been a result of. based upon an assumed posted rack price. and have resulted from. this industry sector would have realized profits of unprecedented proportions. MJ ERVIN & ASSOCIATES 77 . 7. Indeed. and the associated industry initiatives which are ongoing in nature. most outlets used in the 19-market study represent major integrated oil companies. and the marketing sector in particular. intense competitive pressures in the downstream industry in general. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. crude costs. Since 1991. Both the downward trend in margins. if Canadian average pump prices were only one cent higher than they were in 1995. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Thus. including: • • • improving production efficiency through refinery plant rationalizations (closures). despite increases in tax content and crude costs (Finding 12). pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. these findings clearly show that pump price increases are ultimately linked not to increased profits. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Also. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Declining refiner and marketing margins. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). not excessive profits. despite the predisposition of many observers to use them as such.

in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Outlet throughput is a key determinant of inter-market pump price differences. although this study provides comprehensive evidence of this. thereby improving petroleum volumes and ancillary revenues at the remaining sites. MJ ERVIN & ASSOCIATES 78 . Smaller. virtually all of the 19 study markets exhibited similar levels of competition. While competitiveness in most smaller markets was shown to be as active as in larger centres. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. • • At first glance. had petroleum margins which were commensurate with average outlet throughput for that market. 9. When plotted against the margin-volume model. This created some economic pressure to sell product at a higher pump price. Although some smaller markets appeared to have higher gross product margins than larger markets.8. which could actually inhibit competition. In suggesting this approach however. and this study showed that gasoline prices were no exception. That such a relationship should exist was not surprising. isolated markets face particular challenges: although found to be highly competitive. A wide range of petroleum gross product margins were evident within the 19market study group. The costs of most consumer goods in smaller. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. which should. more isolated markets are generally higher than in larger centres. there are three points to consider: • In very small markets. it would seem that if local government in smaller markets were interested in lowering pump prices. the solution would be to encourage some dealers to exit the market. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. most markets. reducing the number of outlets may also reduce the number of competitors. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). according to the margin-volume model. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. Thus. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reduce pump prices. other factors exist which contribute to relatively high margins and prices.5 million fewer litres of gasoline than a group A (major centre) station. When these margins were compared to their corresponding outlet throughputs. poor outlet throughputs were generally the predominant factor. regardless of size. average pump prices were relatively high.

under the current PEI regulatory structure. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). in order to build upon the findings in this study towards a full understanding of the dynamics at work. and in turn. The historical record is clear however: since deregulating pump prices. does not appear to benefit in consumer terms. depressed petroleum revenues below that of outlet operating costs.• A full-serve retail gasoline outlet typically employs 3-5 staff. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. The federal Competition Bureau for example. are an acceptable limitation on pure competition (Finding 8). and the traditional automotive service bay. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. many national and local environmental regulations exist for good cause. Charlottetown. As these findings show. Retail ancillary operations are a critical element of petroleum price competition. This competition then. Also. and as such. will likely preserve a highly competitive petroleum market. Convenience store. the degree of price competition in the retail petroleum has in effect. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. MJ ERVIN & ASSOCIATES 79 . • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. is viewed as an agency which exists to the benefit of industry and consumer alike. The loss of employment represented by a station closure may be of some concern to smaller communities. characterized by narrow product margins and relatively flat pump prices. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and the perceived effect on their markets. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. is well beyond the scope of this study. has seen a decline in pump prices relative to other Canadian markets. as marketers find even more innovative ways to attract market share. 10. car wash. is both the cause and consequence of increased activity in ancillary operations. and likely others in Nova Scotia. the Halifax market. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. 11.

Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. 2. and the converse image held in much of the public domain. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. margins and competitiveness factors. and the nature of competitiveness influences. Develop cooperative industry research into marketing sector competitiveness issues. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. 1. possibly to the detriment of the consumer. in a simple format designed for consumers and legislators. not inhibit. This should be in the form of a quarterly summary of price trends and related measurements. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. that where a healthy competitive climate exists. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.This study proposes rather. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . as it does in the Canadian petroleum marketing sector. Public perception measurement. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. A regular comprehensive competitiveness evaluation. petroleum marketing competitiveness. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. direct regulatory interventions may have an adverse effect on competitiveness.

and in particular. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. by industry. and issues/opportunities facing such markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. consumers. using Canadian and foreign selected markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. and regulators alike. MJ ERVIN & ASSOCIATES 81 . is vital if Canadians are to put in place the structures that truly meet their social and economic needs. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. • • • • * * * Better understanding of this industry. along the lines of the model used in this study.

Appendices MJ ERVIN & ASSOCIATES 82 .

a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. and included in the retail pump price. municipal tax levees. and commission dealers. Marketer . Dealer .a generic term referring to a retail outlet operator. service bays. GST. diesel. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. and in some regions. etc.(for the purpose of this study) the cost. such as lessees.I Glossary of Terms Ancillary service . Excise Tax .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. such as convenience goods. Integrated Oil Company . generally expressed in cents per litre. the regular unleaded pump price..the difference in pump price between a premium or mid-grade of gasoline vs. MJ ERVIN & ASSOCIATES 83 . Major Oil Company . safety and business issues.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. provincial pump tax. health. and therefore purchases its supply of petroleum product from an outside source.. of transporting petroleum product from the rack point to the final point of sale. currently established at 10¢ per litre. car wash. The ex-tax pump price is exclusive of these taxes. in cents per litre.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. independent dealers. Ex-tax Pump Price .a service provided in addition to the basic retail petroleum sales operation. an association of petroleum refiners and marketers. Lessee . Distribution Costs . Usually expressed on a per-unit basis. CPPI . Margin . but inclusive of any corporate taxes on earnings. lubricants. etc.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Grade Differential . such as a major oil company or regional refiner/marketer.the retail price of gasoline that would be displayed if all product taxes were removed. There are several modes (see below) of dealer operation. These product taxes include Excise tax.an organization who sells refined petroleum products to end-use consumers. Independent Petroleum Marketer . such as a retail gasoline outlet. for example. which serves as the voice of the petroleum products industry in Canada on environment.a petroleum marketer who is not involved in the refining of petroleum products. Downstream .Canadian Petroleum Products Institute.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.

the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Rack Price . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Throughput . an association of upstream and downstream oil companies and related organizations.the type of contractual relationship between the supplier and the dealer (outlet operator). the supplier has initial title to the petroleum product as it leaves the rack point.the segment of the oil industry involved in the exploration and/or production of crude oil. the raw material from which petroleum products are manufactured. Supplier . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. In the retail gasoline sector.the wholesale price posted at the rack point. MJ ERVIN & ASSOCIATES 84 . Regional Refiner/Marketer . it is usually based on the market-driven rack price. This may be at a refinery loading terminal.Mode .an organization who. Although in theory the transfer price could be set at any arbitrary value.within the context of retail gasoline marketing. PCF . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. lessee.Petroleum Communication Foundation. these can be broadly classified as company operated.the point at which title to refined product is transferred from the refiner to the supplier. and independent dealer. Rack Point .the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. manufactures (from crude oil) a range of petroleum products suitable for consumer use. commission dealer. Refiner . Transfer Price . Upstream . usually per month or per year.

3 134.2 99.8 106.0 32.2 45.8 93.9 115.7 54.7 124.0 30.1 105.7 22.7 122.5 111.2 92.4 34.2 121.7 29.1 167.2 50.8 108.6 107.1 151.3 132.1 120.4 104. using a weighted (by provincial gasoline demand) 10 city average. No.4 97.6 51.4 122.8 135.7 123.3 19.8 94.5 124.3 40.2 45.5 94.9 97.4 57. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47. MJ ERVIN & ASSOCIATES 85 .0 115.1 48.4 110.7 132.1 120.4 124.8 95.1 87.9 26.6 136.0 1991 126.1 104.8 28.4 104.3 122.2 127.4 27.4 134.2 49.3 1992 128.9 1993 130.3 52.5 30.0 93.9 108.1 104.8 130.0 102.4 29. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.1 40.3 1989 114.5 100.6 91.9 1994 130.3 125.5 112.1 103.2 112.0 19.9 118.2 39.4 136.2 142.0 97.0 42. Nominal (¢/litre) (2) RUL Annual Price.1 144.8 47.8 1987 104.6 122.3 141.1 1990 119.3 58.0 1988 108.5 145.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.9 122. 62-010: Consumer Prices and Price Indexes.5 126.3 119.3 139.3 151.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.6 133.2 30. Nominal (¢/litre) (2) RUL Ex-tax Price.7 30.2 31.2 133.1 126.9 1995 133. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.8 132.2 109.6 92.9 26. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.1 115.0 93.9 155.1 146.3 96.7 118.1 97.4 152.5 25.7 95.1 117.1 117.0 111.5 115.3 55.1 26.8 104.3 27.0 104.0 135.4 45.4 53.2 20.7 96.5 120.3 115.5 49.3 160.4 120.

6 21.3 6.4 53.0 9.7 29.7 39.7 4.7 29.9 22.3 12.2 12.7 34.3 22.6 4.7 8.0 24.5 6.7 31.4 21.0 28.9 26.5 26.4 14.3 14.7 4.0 14.6 24.6 5.1 18.2 11.8 23.6 28.9 14.7 18.2 16.4 31.0 24.4 34.7 19.8 21.9 26.6 25.3 6.8 22.9 9.3 13.2 23.6 23.9 4.0 16.7 14.7 6.6 54.0 24.9 56.4 29.2 7.7 14.7 14.2 27.2 7.8 11.6 20.9 17.9 23.0 10.0 16.8 55.0 52.5 8.2 41.2 26.4 24.0 26.8 8.Table B: Key Price / Margin History .9 56.8 23.5 22.4 13.9 4.3 15.3 13.0 24.8 16.5 14.9 15.8 21.2 25.8 14.2 6.3 58.3 23.2 13.4 32.6 9.6 52.3 13.6 13.1 24.5 23.8 8.5 32.9 24.1 9.3 13.3 24.4 30.1 17.2 21.9 6.9 6.3 57.9 8.1 16.4 MJ ERVIN & ASSOCIATES 86 .4 22.1 53.9 53.6 26.1 21.2 24.4 57.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.8 14.0 22.1 23.9 30.7 14.0 20.3 5.7 29.7 63.2 8.2 27.4 26.0 26.1 16.5 11.1 23.9 25.2 13.9 23.1 19.9 21.8 53.0 13.1 23.5 30.2 7.4 31.7 23.9 53.0 7.4 15.2 25.6 25.5 56.7 28.1 39.0 55.2 56.3 15.0 12.5 54.4 14.1 16.5 33.2 23.2 13.0 24.3 56.9 58.7 13.5 35.6 54.7 33.8 55.2 15.0 16.2 14.0 33.6 18.2 65.2 13.9 25.5 10.2 14.2 22.4 7.8 57.6 7.0 7.8 29.3 25.4 8.1 18.5 15.6 26.2 5.9 14.3 54.9 23.0 7.3 13.4 12.7 15.4 24.5 7.1 5.3 26.3 17.0 5.3 54.4 56.4 26.9 6.3 4.5 7.7 7.4 33.3 42.2 16.1 16.5 25.4 20.3 Tax Content 23.3 9.3 22.4 58.0 24.7 14.2 27.5 31.9 12.5 27.8 14.8 13.9 7.7 32.7 Downstream Margin 14.0 25.6 23.4 13.8 14.1 13.6 8.9 25.3 66.0 26.0 24.2 63.5 23.1 13.9 11.5 10.0 16.2 4.1 52.8 33.9 13.8 26.8 15.1 29.1 7.8 28.5 19.7 7.8 9.7 19.5 57.6 26.9 25.9 31.7 24.1 13.5 27.9 54.1 22.9 55.8 30.3 26.9 7.2 7.1 22.9 55.4 14.1 7.6 6.2 6.5 16.4 9.2 26.4 26.1 53.3 54.7 25.7 18.4 14.1 25.9 25.7 58.5 26.5 5.8 25.7 7.7 12.5 14.3 56.8 53.6 13.0 15.9 7.0 25.0 4.8 26.6 54.5 23.0 54.7 4.2 29.5 28.4 55.0 8.5 Gross Marketing Margin Gross Refiner Margin 53.8 24.

3 7.3 21.9 58.0 57.6 20.1 24.3 58.2 26.0 26.3 9.1 26.5 13.2 4.1 6.9 17.2 26.6 3.3 55.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.1 10.9 4.0 53.4 4.0 29.4 16.2 7.7 18.2 25.9 6.5 7.9 49.4 21.9 4.7 29.7 26.3 28.4 7.5 15.9 49.1 51.1 16.3 23.0 6.3 26.8 28.4 51.7 53.0 12.6 20.7 24.6 53.0 14.6 23.3 13.0 5.5 6.0 27.9 23.1 6.4 26.7 25.3 4.3 26.4 25.8 23.1 26.2 25.5 28.1 11.2 20.4 32.1 11.0 54.3 8.3 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .0 28.0 52.9 9.6 9.4 6.1 15.4 6.3 26.9 5.1 Gross Refiner Margin 7.8 49.4 13.5 21.8 29.2 27.9 11.1 21.2 54.3 4.1 15.0 11.2 4.5 4.1 6.4 6.2 23.2 7.1 54.8 20.8 4.6 10.3 6.4 11.7 26.3 54.6 19.6 10.2 14.7 53.8 25.8 52.9 Downstream Margin 12.3 4.9 19.3 26.3 27.0 25.6 11.0 9.2 49.0 28.1 26.0 6.7 13.9 3.2 20.5 17.0 14.2 7.7 8.0 24.5 25.9 29.8 6.4 25.9 12.6 12.3 26.7 12.5 5.0 28.2 5.3 26.6 4.4 15.1 55.7 53.7 6.7 25.5 3.5 14.1 61.7 13.1 14.7 5.0 28.3 26.2 12.9 28.7 6.7 24.6 27.2 Gross Marketing Margin 4.6 15.1 14.5 9.5 11.4 28.7 3.1 Tax Content 26.2 15.0 5.3 9.0 6.5 54.7 5.6 4.1 11.7 3.7 14.4 5.3 25.8 17.5 21.5 3.5 13.7 14.9 26.5 19.1 14.5 21.7 15.2 14.1 6.2 26.6 17.4 24.9 14.8 10.8 28.7 16.2 7.3 28.5 6.5 5.6 21.3 7.9 29.6 53.5 55.0 9.7 7.4 21.5 20.5 2.1 11.8 22.5 19.7 52.9 14.3 26.1 57.5 6.0 25.8 50.5 11.2 9.7 51.7 7.4 26.7 23.1 51.4 6.2 28.4 26.9 27.1 20.9 12.9 27.6 15.6 16.6 5.3 53.0 26.0 12.2 11.5 23.3 21.1 3.2 14.8 27.8 23.5 53.0 28.3 9.4 26.1 15.3 12.5 7.

019.299 2.837.4 32.521 2.952.114 3.935 3.938.883.502 2.378.932 2.182 3.011 2.422.647.958.2 27.130 3.323 3.781.131.311 3.133 3.518.889 3.682.1 29.3 22.3 24.102.232 3.322 3.045. Demand.354.299.437.666.1 23.725.9 17.331 2.075.637 3.097 2.0 24.3 26.822.218 3.2 24.108.286.765 3.180.8 27.684 2.315 2.326.627 2.743 2.839 2.620 3.782 3.322 2.884 2.622.132.4 31.904.508.9 23.775.373.509 3.338 3.4 24.3 23.831.037 2.7 28.8 MJ ERVIN & ASSOCIATES 88 .269 2.894.565.934.636.0 28.979 2.7 24.1 23.897 3.621.5 30.827 3.161.859 2.661 Canadian Domestic Gasoline Sales (M3) 2.5 19.085.844.6 21.9 23.298 2.281 2.871 2.1 21.122 2.020 2.4 24.193 3.475 2.968 3.1 22.823.160 3.287 2.254.732.840.202.279 2.748 2.141.333.8 29.3 Canada Avg RUL Rack Price (¢/l) 35.083.8 33.779 2.642.2 27.485 2.2 27. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.6 28.458.672.301 2.5 25.462.7 24.9 26.242 2.7 29.8 26.411.089.633.979 3.710.890.6 26.773.450 2.7 29.113.752 2.798.180 3.626.729.015 3.589 3.9 30.833 2.869 2.969 2.067.799.025.739.301.5 28.804 3.767.051 3.176 2.263.335 2.2 22.268 2.416 2.651 2.973.893.295.181.441.056 3.256 2.2 23.8 30.250.437.246 2.532.714.029 2.179 3.796.709 2.490 3.321.000 3.220.039.646 2.4 21.168 2.677 3.853 2.457 2.287.476.469 4.2 26.897 2.976.313 2.7 31.625 2.785.003.141 3. Inventory.7 18.930 3.880 Canadian Retail Gasoline Sales (M3) 2.2 20.703 2.733 2.3 23.688.876.381 2.3 22.630.830.4 21.818.5 27.970 3.9 21.998.152 2.633 2.455.544 3.874 3.4 29.345.142.7 26.300.8 23.176 3.389.122.369.9 26.370 2.206.966.2 21.285 2.7 34.501.931 3.202 3.841 2.9 22.120.960.853 3.415 2.767.5 22.810.047 2.667 2.095.6 23.101 2.2 23.291.995.804 2.967 2.566.5 23.970.412 2.262.9 31.245.599 2.361.4 22.843.604 2.324 2.771 3.255 3.2 26.878 2.636.716.283.9 23.346.002.297 2.615 2.2 29.461 3.8 22.673 2.1 23.1 16.329 3.8 23.164.045 2.035 2.8 21.281.5 31.070.477.644 3.301.0 20.873.510 3.369 2.498.628 3.709 2.941 2.045 2.199 2.609.853.801.095 2.619 2.930.558.4 25.499 2.720 3.580 3.8 28.612 3.130 3.808.429 2.192.270 3.325 2.403 2.101.600.379.254.587.7 29.735.671.7 21.516.886 3.191 2.748.112 2.9 19.801.693 3.2 27.480.641.254 2.456 2.443 2.933 3.564 2.251.070 3.592 2.682 3.235 3.9 29.5 32.970.661 Canada Avg ex tax RUL pump price (¢/l) 39.473.026 2.Table C: Canadian Supply.409.744.427.687.887.900.322 2.897.287 2.218.047 3.558.6 24.654.429 2.027 2.572 2.669.864 2.439.201.294.044 2.430.813 2.193 3.802 2.377.141.865.366 2.180 2.022.209.030.073 2.5 27.316.140.151.188 3.479 2.081.613 3.

074.170 3.1 24.170 Canadian Retail Gasoline Sales (M3) 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .048. demand.6 20.005 2.8 24.077.679.7 19.714 2.264 2.222 2.344 3.961.037 3.4 26.614.5 source: Statistics Canada (production.936 3.415 2.6 20.112 3.977.692.840 2.9 22.675 2.671.382.006 3.797.825.649.717.346 2.539.324.660 3.320 3.863.264 2.0 24.480 2.505 2.830 3.214 2.5 25.606.198 2.148.8 21.566 3.638 2.785.986.919 2.336.516 3.0 26.4 26.970.182.376.806.2 26.4 25.2 25.796.656 3.753 3.864 2.0 26.648 3.097.607.703 3.205 2.601 3.469.904.294 3.467 2.994 3.7 22.0 25.930.906.597 2.414 3.244 3.9 29.940 2.250.7 Canada Avg RUL Rack Price (¢/l) 20.669 2.620.082.317 2.857.791 3.363.483.386 3.537.8 28.370.644 3.204.198.338 2.9 27.130 3.593.984 3.658.315.7 21.5 21.055 2.386 3.195.799 2.617 2.999 3.555.068.426.997 2.8 20.1 21.442 2.155 2.965.521 2.519.149.4 20.184.667 Canadian Domestic Gasoline Sales (M3) 3.390.881.773.928 3.5 21.219 Canada Avg ex tax RUL pump price (¢/l) 27.261.0 25.165.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.179.8 25.141 2.198.871 3.2 25.649.324 2.889.123.

9 53.9 58.1 53.5 57.3 56.6 48.9 64.3 54.8 56.0 62.7 62.9 53.6 49.4 55.2 62.4 55.4 47.7 52.0 44.1 49.2 48.4 46.3 52.7 65.0 52.9 59.1 49.5 52.2 50.1 55.0 61.8 56.5 58.9 57.9 51.2 57.4 53.6 50.7 45.1 52.4 55.3 59.9 56.5 60.2 65.7 57.0 61.8 47.9 56.7 53.8 56.0 48.8 54.9 51.7 48.3 61.2 62.4 57.5 47.9 54.9 54.9 51.6 58.9 45.4 49.7 65.5 45.4 46.5 51.9 59.8 48.4 57.0 62.7 63.3 42.4 52.2 47.6 50.7 65.1 56.9 56.9 55.5 58.5 55.9 51.5 58.9 52.5 60.5 52.9 53.9 52.0 39.1 41.3 49.5 59.5 57.4 56.6 48.9 53.8 51.5 50.4 56.4 48.4 58.5 58.4 52.1 50.7 65.9 61.9 52.5 60.9 61.2 61.4 55.6 55.8 64.3 62.2 55.0 61.9 56.7 51.5 53.7 54.9 54.4 53.9 44.8 57.9 54.3 50.0 61.3 52.8 49.3 55.9 50.8 57.9 54.8 44.5 56.5 59.8 53.4 53.9 62.7 50.5 56.1 49.7 White Rock Calgary 45.8 50.9 52.5 Vancouver 53.5 57.7 57.5 58.5 56.7 45.2 56.4 61.7 53.5 57.2 62.3 55.2 46.5 57.0 57.9 58.8 52.1 55.9 61.5 62.5 59.3 48.5 54.1 55.4 55.5 59.2 50.6 56.1 43.2 62.8 53.8 52.0 58.6 55.4 56.9 53.5 45.9 47.5 58.8 56.2 51.6 47.1 60.4 54.4 61.9 MJ ERVIN & ASSOCIATES 90 .5 46.9 56.2 65.9 64.7 51.8 52.8 52.2 54.9 56.8 48.0 55.5 57.7 54.7 54.5 57.2 51.9 56.7 52.8 53.5 57.6 47.9 49.9 47.4 58.7 51.7 62.5 53.5 59.1 52.9 49.9 55.9 53.8 59.5 59.5 58.6 58.6 62.6 53.6 59.0 59.8 53.8 55.9 54.8 48.5 61.5 57.2 46.4 65.3 52.5 54.5 51.9 53.7 46.1 50.4 54.6 48.2 58.9 54.2 Nanton Peace River Regina 49.9 56.7 48.4 46.9 63.3 51.6 53.9 55.5 47.2 63.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 61.5 58.2 54.9 64.0 54.6 46.5 51.8 Thompson 59.4 54.3 50.2 62.2 46.5 61.4 52.6 52.4 56.4 61.5 56.8 45.9 61.1 53.0 50.9 52.6 51.4 52.4 63.3 49.9 55.8 59.1 44.5 57.0 62.9 64.2 62.5 49.4 55.8 52.0 59.4 50.4 56.9 53.0 52.6 44.5 57.5 60.8 41.7 65.5 53.Table D: Pump Price History .6 46.9 56.5 60.8 50.9 53.9 53.5 57.1 59.2 62.1 44.8 56.0 Sioux Lookout 62.9 61.9 49.9 46.0 61.2 62.9 47.7 49.4 52.2 62.5 59.9 48.6 54.9 53.9 54.8 48.5 47.3 48.5 59.9 52.5 60.5 55.3 52.5 51.5 58.2 43.9 56.5 57.7 50.3 54.9 52.5 51.5 58.0 61.5 56.0 46.5 58.7 44.9 57.2 54.7 53.2 51.0 61.9 58.8 56.5 59.6 54.9 58.3 52.2 59.9 47.4 Winnipeg 49.5 58.9 62.9 44.2 50.9 56.4 59.6 47.9 58.8 47.4 56.9 64.

6 54.8 55.3 53.8 55.1 54.5 Ottawa 58.0 55.6 52.3 55.7 54.5 60.7 44.3 54.4 53.5 61.6 63.0 52.9 55.1 56.0 52.9 51.1 59.1 53.5 MJ ERVIN & ASSOCIATES 91 .1 55.8 47.1 59.9 54.0 55.2 58.0 57.2 52.4 54.3 54.9 53.7 56.7 50.9 55.3 53.9 61.9 64.8 55.2 56.1 54.4 57.2 55.9 55.9 63.2 52.7 48.0 47.1 52.6 63.3 55.6 55.3 55.8 61.6 53.2 55.0 57.7 60.3 49.5 56.6 58.4 53.7 52.9 58.7 56.6 55.6 54.8 53.3 54.3 52.9 55.8 63.1 56.3 54.0 56.4 55.0 58.4 58.3 55.1 61.5 54.0 60.3 52.7 59.8 Halifax Charlottetown 60.3 54.5 55.6 55.4 58.0 59.3 54.4 45.3 55.3 60.4 58.5 63.9 49.4 54.7 56.7 46.2 53.2 50.2 51.4 53.8 50.6 60.5 52.3 62.2 53.0 53.5 55.7 57.1 55.7 57.8 52.2 58.5 57.5 61.6 58.6 59.8 57.6 53.2 55.2 Montreal 63.8 57.8 54.1 57.0 55.5 54.2 55.2 51.9 50.2 59.9 55.0 48.9 56.0 53.5 53.4 55.3 56.5 56.0 47.4 51.9 57.3 59.7 56.2 55.5 54.2 56.3 54.5 51.2 57.0 60.6 59.6 57.2 49.6 50.4 52.6 53.0 57.5 52.9 61.1 53.0 53.8 50.5 64.9 56.2 54.9 49.6 61.6 56.1 58.7 52.2 57.5 59.0 60.7 51.5 61.9 58.3 59.7 57.3 56.7 51.7 64.1 51.0 55.6 52.1 60.0 48.3 54.3 54.3 58.5 67.9 57.3 56.7 59.2 58.6 54.2 56.7 48.3 52.1 60.6 49.8 55.6 54.Table D: Pump Price History .7 58.0 52.7 54.1 53.3 55.2 51.6 52.5 57.1 61.9 61.1 61.7 56.5 63.2 61.6 63.9 53.7 53.5 63.6 56.9 60.5 54.2 57.0 55.9 62.2 57.9 56.4 52.0 52.6 54.1 48.0 52.0 59.3 59.8 60.3 56.9 54.7 49.5 54.8 53.1 54.2 54.9 61.6 55.4 54.8 49.0 56.9 61.0 49.2 56.4 58.7 57.5 58.9 49.8 52.0 59.6 51.2 56.5 60.9 53.0 50.8 53.4 57.4 58.9 57.6 54.2 54.2 54.5 51.2 49.6 52.1 56.7 54.6 59.5 64.9 60.1 54.2 61.0 50.8 56.6 55.9 53.8 56.7 47.2 60.2 52.2 59.6 55.7 54.8 54.2 57.9 55.5 59.1 51.8 59.5 55.5 59.4 54.2 49.0 56.8 55.4 54.2 Chicoutimi Gaspé Saint John 60.8 61.0 50.2 57.5 52.8 55.6 58.5 48.9 55.1 58.1 54.9 64.4 51.8 57.8 50.4 51.1 57.1 52.7 58.7 52.2 54.0 54.9 56.7 51.6 55.6 51.8 49.4 49.9 54.2 61.3 53.7 54.2 57.6 56.6 51.3 49.5 53.5 56.6 52.1 49.7 54.1 55.6 52.5 51.3 51.6 53.6 61.6 58.2 57.9 55.1 55.0 60.5 54.2 56.1 55.8 60.7 55.6 54.3 57.0 61.3 53.4 57.0 52.9 64.0 54.6 49.5 56.2 49.1 58.8 54.1 Toronto 52.8 54.7 56.6 58.3 59.0 57.4 58.3 52.4 53.4 50.5 56.1 53.0 54.6 56.4 54.4 54.4 54.8 55.2 55.3 53.7 53.9 55.1 52.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.1 51.0 51.1 58.9 55.2 57.1 54.0 61.5 52.0 51.1 57.3 61.0 54.5 53.5 57.9 49.8 51.5 53.4 57.5 54.5 51.2 56.4 60.3 56.5 57.9 57.8 55.2 56.6 50.2 60.9 52.5 57.6 50.9 53.7 57.6 52.7 51.2 57.4 57.1 55.0 55.1 53.9 60.6 Canada Avg 55.2 53.4 57.

4 23.1 27.5 24.5 26.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.5 29.7 Mar-94 28.4 25.3 33.6 25.6 28.3 31.1 19.6 27.6 26.7 31.0 27.2 25.3 23.0 26.0 25.8 27.9 25.8 24.6 26.3 23.9 21.6 25.0 26.0 23.7 Jan-92 31.6 May-95 29.2 28.6 Jun-92 32.1 22.4 MJ ERVIN & ASSOCIATES 92 .2 27.7 Sep-94 32.5 29.9 24.7 30.5 26.8 24.3 30.9 25.6 27.9 27.4 31.6 Sep-93 28.4 29.8 Jan-94 25.1 27.4 27.2 27.0 24.8 24.4 22.1 22.3 28.5 Oct-92 30.4 20.9 23.0 23.6 26.7 28.0 25.3 Dec-95 Edmonton Regina extax extax 27.8 29.9 24.5 Jul-94 29.2 28.6 Mar-93 28.9 24.6 22.6 29.0 32.4 26.1 30.8 Dec-93 26.0 24.1 23.6 24.0 23.0 Jun-93 26.6 27.0 28.1 28.1 30.3 21.1 25.5 Aug-94 28.3 24.6 28.4 31.3 27.7 27.4 29.4 31.1 25.4 27.4 30.3 26.8 29.1 24.9 28.4 28.4 27.2 29.2 Apr-93 28.2 24.5 23.4 24.2 24.1 31.5 Feb-92 28.4 30.5 29.4 28.7 24.1 24.9 30.4 22.0 23.5 Sep-92 29.7 29.3 27.0 31.3 29.6 24.2 Dec-94 26.8 26.1 25.7 Aug-92 24.5 Nov-95 30.5 28.2 Nov-92 31.5 27.6 29.3 29.9 30.2 29.4 29.3 29.9 21.9 27.8 31.8 23.3 Jan-93 30.4 25.7 30.0 29.4 25.3 28.3 May-94 28.7 Jan-95 27.6 26.7 26.6 26.0 May-92 28.8 27.6 29.7 Sep-95 30.8 27.0 Apr-92 30.3 24.6 30.1 28.7 28.3 30.4 27.2 28.2 26.6 26.9 27.5 24.9 26.8 27.6 30.Table E: Ex-tax Pump Price History .8 Toronto extax 26.3 29.7 26.5 27.4 21.4 25.1 Mar-95 29.1 20.2 Jun-94 31.2 22.6 26.3 28.8 27.7 29.9 27.7 30.3 26.4 30.7 30.5 23.2 24.7 24.3 29.9 25.7 26.4 29.8 21.1 25.4 27.0 26.8 26.6 26.6 Aug-95 30.6 29.6 23.9 30.1 31.4 31.4 29.4 Dec-92 31.6 30.5 24.8 25.9 26.1 Feb-93 29.3 32.1 24.4 20.4 28.7 30.6 21.5 21.1 26.6 27.2 32.5 Oct-95 30.9 20.5 21.9 29.0 25.9 28.4 24.7 26.4 31.9 Oct-94 32.0 22.9 23.0 21.5 27.0 May-93 29.3 26.4 23.3 30.8 22.5 29.4 22.9 Jul-93 28.4 20.3 24.9 29.3 26.7 28.8 28.7 28.0 31.4 23.1 Apr-94 29.9 25.4 31.0 24.9 24.4 Jun-95 30.7 25.6 23.5 25.3 29.3 Jul-92 31.5 29.3 28.6 23.6 23.9 24.0 27.2 Nov-93 27.8 28.6 22.7 28.3 28.2 28.9 25.8 25.8 29.0 Oct-93 28.2 23.4 30.2 Nov-94 29.3 29.1 26.8 26.7 Winnipeg extax 27.0 23.3 Feb-95 26.8 Feb-94 24.7 29.1 Apr-95 30.2 26.8 24.9 26.3 29.7 28.9 29.4 25.7 29.8 26.5 27.3 29.4 Mar-92 28.8 25.4 29.4 29.5 Jul-95 30.7 27.9 28.3 29.9 28.9 26.4 31.3 30.2 26.5 27.9 Aug-93 30.2 26.9 31.8 27.2 25.2 24.8 28.3 26.8 29.

1 34.0 36.2 27.0 26.5 28.6 32.4 36.2 27.7 30.2 30.2 25.3 25.7 29.9 29.4 33.0 34.9 29.5 24.6 28.9 32.0 27.8 32.2 28.1 25.5 26.5 25.2 30.7 27.2 26.2 24.6 31.9 27.6 32.6 34.8 25.6 32.2 34.8 30.1 26.7 24.9 28.8 28.7 24.1 24.9 32.2 25.7 24.3 28.6 28.9 29.4 27.5 27.3 25.0 32.2 21.0 29.6 27.1 30.6 28.4 28.5 25.5 30.2 24.1 24.6 25.3 29.4 24.6 33.6 36.3 28.8 26.3 26.5 33.0 23.3 31.3 27.5 25.1 32.8 26.2 33.7 22.7 27.7 24.3 28.7 32.3 28.8 23.8 33.3 27.0 29.9 30.2 25.8 29.7 26.3 26.9 29.9 30.7 26.4 31.2 26.2 22.9 30.4 33.5 26.8 29.7 28.2 30.1 29.1 23.Table E: Ex-tax Pump Price History .8 29.5 28.9 27.9 31.8 27.5 24.6 23.9 29.8 28.7 28.4 28.3 29.0 25.4 24.2 26.3 29.2 22.1 28.4 32.1 28.8 Canada Avg extax 29.4 25.1 34.0 25.0 26.4 26.2 32.4 25.2 32.8 32.9 35.2 27.9 32.0 28.3 22.2 28.5 25.7 30.7 27.4 33.9 24.0 33.2 27.8 29.0 30.1 32.5 32.9 29.7 Quebec extax 32.8 27.7 26.4 26.3 29.9 27.6 27.2 25.0 32.3 25.6 32.4 22.6 36.7 24.1 24.4 33.1 31.0 36.3 34.2 27.5 33.3 34.8 26.4 32.7 25.7 33.2 27.1 34.8 24.0 34.3 31.4 26.0 33.8 32.2 36.4 33.5 27.4 25.4 36.5 30.8 28.3 31.8 28.3 35.6 23.0 25.7 32.8 32.6 26.6 26.2 32.8 25.3 31.5 28.3 28.6 26.5 25.4 25.9 23.3 30.7 26.0 33.9 29.5 29.7 28.7 MJ ERVIN & ASSOCIATES 93 .2 22.3 29.2 28.1 29.0 30.9 27.1 22.1 30.3 24.8 28.9 26.6 32.2 23.6 27.9 27.5 36.6 31.9 28.6 24.6 28.2 36.7 34.8 25.8 28.8 27.5 27.5 33.9 32.6 28.0 29.4 32.9 30.8 23.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.7 28.0 33.1 30.8 27.7 27.0 34.6 29.5 25.7 29.5 30.6 26.6 34.9 33.4 21.8 30.8 23.1 24.0 33.4 31.0 28.3 33.7 28.7 26.7 32.0 28.0 28.2 Saint John Halifax extax extax 34.3 26.8 33.5 27.0 28.5 34.6 Charlottetown extax 36.3 31.0 23.8 26.2 29.9 37.1 32.2 22.1 Montreal extax 31.8 26.6 22.1 32.2 26.6 25.2 27.8 25.4 34.6 29.0 26.5 31.2 27.8 36.9 33.9 31.7 23.0 31.7 23.8 30.9 26.2 33.3 34.3 23.3 25.7 23.2 26.7 34.4 31.1 26.8 23.1 29.2 27.9 30.5 28.8 29.5 31.7 26.6 33.9 26.

2 20.7 23.8 22.3 21.5 23.9 22.9 17.8 18.8 25.1 15.1 20.1 24.1 22.1 21.0 23.2 16.7 17.4 23.0 19.1 Halifax rack 20.5 23.3 23.8 19.7 MJ ERVIN & ASSOCIATES 94 .2 21.9 22.9 24.6 23.1 21.7 22.1 21.7 21.8 23.8 20.1 21.4 20.6 19.3 23.9 21.5 21.2 20.6 25.4 22.2 22.2 21.5 21.0 22.0 23.2 21.8 23.8 21.4 23.5 17.5 24.2 23.9 20.4 23.8 20.4 22.8 20.1 22.3 24.0 23.8 22.6 19.4 22.3 18.8 18.2 22.9 22.4 20.1 23.2 23.8 22.0 22.4 21.5 27.4 21.2 19.0 19.5 19.5 23.7 20.7 19.7 22.7 17.7 18.5 20.8 19.3 23.3 23.5 21.8 22.9 23.1 18.9 22.6 19.6 22.2 Quebec city Montreal rack Toronto rack rack 19.8 21.5 20.8 19.6 20.4 22.1 23.8 23.9 21.9 18.4 15.9 22.6 20.7 21.1 21.4 21.1 22.9 21.6 21.0 22.8 19.4 21.0 21.7 21.8 20.8 23.3 22.1 16.2 16.2 19.7 21.4 22.0 21.6 25.4 19.6 20.6 23.2 18.4 21.4 22.0 22.0 20.6 23.5 21.7 20.6 18.0 24.2 19.5 22.4 22.3 24.7 22.8 21.1 21.3 22.2 21.4 17.2 18.6 25.1 20.5 24.6 23.3 22.2 23.8 Ottawa rack Thunder Bay rack 20.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.6 23.5 22.0 23.5 26.6 20.4 24.0 21.5 22.7 23.3 23.5 22.0 21.5 21.4 21.7 22.3 21.1 21.1 20.0 23.0 23.1 22.9 20.2 20.5 20.8 20.5 22.6 21.3 20.4 21.Table F: Rack Prices .5 19.7 22.2 20.3 21.4 21.3 18.9 21.4 21.2 18.1 23.3 20.5 24.3 23.3 17.1 20.4 20.1 20.1 20.1 22.8 22.8 18.8 21.8 24.3 20.3 19.7 22.3 19.2 18.7 16.2 20.2 23.6 20.1 19.8 20.4 22.0 23.0 23.6 20.3 26.9 18.4 23.3 18.0 21.6 19.7 21.6 19.2 16.1 22.1 21.6 23.0 21.5 20.5 17.8 23.2 29.9 25.7 18.5 22.9 19.4 20.7 21.9 22.9 22.7 17.4 21.1 20.4 22.3 17.4 20.1 15.9 18.7 21.0 21.9 23.0 19.3 21.3 23.3 19.7 22.2 21.3 20.7 22.9 20.3 21.7 20.1 19.1 20.4 18.2 20.3 17.2 18.4 22.2 21.4 22.8 23.3 19.0 22.5 17.2 21.4 21.9 21.9 21.5 18.4 21.2 22.0 20.5 21.7 19.7 22.8 21.9 18.6 20.0 22.6 19.8 23.5 21.5 18.1 22.2 17.2 21.4 21.8 27.8 21.5 21.8 18.3 22.1 19.

0 22.3 23.5 24.6 20.6 25.5 21.3 24.9 21.0 20.6 21.3 17.8 20.6 17.9 24.5 23.7 22.9 22.3 20.9 23.8 23.9 22.5 Canada avg rack 22.4 21.5 21.8 23.1 18.6 23.9 21.9 18.0 18.5 22.1 23.4 21.1 21.8 20.6 21.8 21.1 20.4 23.9 21.8 24.9 22.9 19.8 24.2 21.7 17.9 21.0 21.7 21.0 18.6 23.2 23.5 24.6 21.2 22.1 22.1 23.4 24.4 21.8 24.3 17.6 23.1 19.2 24.7 23.7 21.8 20.6 24.4 24.3 24.7 22.3 23.1 21.9 23.5 19.7 21.4 23.1 22.4 21.3 22.1 21.2 23.9 22.2 22.0 20.3 17.8 21.5 17.7 22.2 22.8 22.2 22.9 23.7 21.0 23.4 21.3 20.2 23.5 23.1 20.5 24.8 19.0 22.8 21.1 23.7 23.2 24.3 24.9 21.1 21.9 23.Table F: Rack Prices .7 18.1 23.7 21.2 22.5 19.9 23.1 25.3 19.2 23.2 24.7 23.9 22.9 20.9 22.9 22.3 20.3 20.6 20.7 21.7 20.0 21.7 19.1 23.7 21.2 19.9 22.5 22.5 21.3 23.5 22.6 21.4 20.6 21.7 22.9 18.1 21.0 21.8 Vancouver Victoria rack rack 24.7 21.6 25.2 21.8 22.6 19.1 23.5 22.4 22.9 19.8 21.6 20.1 22.0 22.2 21.2 Edmonton Rack 23.6 24.6 23.2 24.7 25.3 23.6 23.1 24.4 21.8 18.7 23.9 19.9 19.5 19.4 19.6 21.1 19.9 22.3 21.9 17.9 24.6 19.8 22.2 21.9 19.7 25.9 20.0 20.2 19.3 23.8 23.7 22.7 21.5 20.5 21.0 24.2 22.1 21.3 19.4 24.6 22.2 22.2 24.9 21.0 21.2 22.2 20.5 23.1 23.0 22.1 17.1 23.9 19.0 25.5 20.0 17.7 21.9 21.0 22.6 21.7 23.0 17.0 23.9 21.6 23.0 23.5 20.3 18.5 22.5 23.3 21.8 22.7 17.5 23.0 21.6 22.2 23.5 MJ ERVIN & ASSOCIATES 95 .3 21.7 21.0 22.8 22.7 22.8 20.9 21.1 21.1 25.0 22.1 21.4 20.7 22.0 23.3 23.1 16.4 22.5 21.1 25.2 23.5 23.9 23.7 22.5 23.2 20.2 18.6 22.5 18.1 22.0 23.1 18.7 22.2 20.6 21.7 24.5 19.4 22.6 21.8 23.5 24.6 21.3 24.5 22.9 24.1 20.7 24.8 20.4 23.4 23.7 22.2 21.4 21.4 22.4 22.8 22.9 20.7 21.5 21.1 16.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.3 22.0 20.5 21.4 18.4 25.0 24.0 22.3 21.6 23.5 21.5 20.0 24.6 22.1 22.6 25.4 19.5 21.3 22.6 20.6 17.2 20.4 21.4 24.2 20.1 23.1 23.3 22.8 25.5 21.1 22.9 19.0 24.6 23.7 24.3 23.5 18.

475 1.48 56.377 30.50 56.018 2.905 183.903 33.858.97 63.30 68.060.40 61.890 2.935 758.686 273.702.18 51.88 64.516.23 63.204.933 25.448.60 50.298 576.625 64.120 570.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.332 101.26 49.30 63.60 49.030.678.420.72 63.949 1.50 56.296 179.895 600.554 2.246 2.50 55.000 63.32 51.00 48.745.30 54.55 58.89 60.211 15.250 748.11 58.897 350.508 2.749 91.922 103.058 2.460 833.25 57.529 123.10 52.93 63.438 591.412 722.45 53.119 632.830 2.196 669.192 2.20 54.628 702.70 49.483 2.052 84.30 57.30 54.90 63.26 63.894 1.214 248.166 102.10 53.35 73.850 126.88 54.34 63.20 58.30 52.859 240.17 Diesel 64.832 91.150 48.73 65.500 378.249.24 61.796 2. MJ ERVIN & ASSOCIATES 96 .53 48.10 59.980 120.22 59.20 60.101 447.400 142.704.40 63.614 3.13 58.70 55.414 450.238 2.19 52.83 68.000 217.834 71.698 Note: Regional.90 62.101 256.66 50.97 51.60 60.009 54.636.40 54.89 65.549 111.018.014 3.02 51.07 61.20 59.971 473.811 120.671 399.19 49.194.74 57.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.45 63.234 799.557.23 53. and All Study Markets are weighted (by market population) averages.53 61.837 329.80 64.86 56.174.945.78 67.796 529.985 636.42 53.00 62.145.60 70.98 59.40 59.40 58.621 102.102 98.16 59.687 1.00 66.00 67.00 57.300 578.669 203.113 2.513 19.141.30 66.10 63.790 185.972 429.85 48.72 74.20 61. Urban.153 316.03 58.483 63.997 397.245 351.620.749 243.000 1.28 65.241 451.334.26 44.92 51.370 41.65 54.268 478.90 67.38 56.Table G: Study Market Data .72 58.85 54.87 61.597 2.220 389.983 1.00 57.093.173 568.89 61.702 333.770 2.810.643 184.36 54.712 1.000 1.056.543 2.94 55.

59 28.09 27.45 20.33 21.25 24.43 28.43 20.51 20.33 21.92 21.73 32.41 27.45 29.36 26.97 25.82 28.64 28. Tax (by Grade) Rack Pt.51 31.93 23.47 28.96 24.40 25.83 24.76 24.45 28.49 31.59 22.39 22.51 25.45 25.33 22.47 20.39 22.88 28.63 28.26 27.04 26.65 21.33 21.43 20.93 23.38 24.63 26.02 23.07 26.25 31.81 28.91 21.16 21.31 22.Rack Price.16 29.27 29.15 29.27 20.21 27.51 25.35 25.39 Note: Regional.74 21.41 22.98 25.88 20.81 25.89 26.04 24.23 26.57 29.33 22.54 28.Table H: Study Market Data .07 26.89 25.88 20.13 23. MJ ERVIN & ASSOCIATES 97 .09 24. and All Study Markets are weighted (by market population) averages.83 23.42 27.40 27.39 21.53 23.03 24.83 22.45 22.42 24.47 27.88 22.18 28.59 22.89 28. Urban.92 30.23 24.15 27.25 27.90 26.33 21.23 23.57 22.88 28.50 25.83 24.34 20.73 26.38 24.76 25.55 28.15 24.17 20.63 24.26 28.20 20.69 27.33 21.58 25.15 20.63 25.95 22.92 20.18 25.33 22.03 20.95 25.59 24.01 28.42 25.97 23.68 Diesel 36.81 27.33 27.28 23.23 25.96 24.07 24.30 29.43 21.94 23.63 21.75 27.82 21.08 25.89 29.84 28.75 22. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.88 22.84 28.45 29.42 24.69 23.07 24.03 21.56 22.78 Product taxes Midgrade Regular 26.59 28.34 25.95 22.45 24.48 25.49 21.36 24.39 21.25 28.85 28.20 27.96 22.99 26.81 21.08 23.99 28.43 21.93 27.65 27.92 22.97 22.45 20.59 28.28 22.50 20.49 25.45 23.01 22.83 25.45 20.98 28.65 26.95 Premium 26.34 26.90 27.21 27.55 28.45 20.83 24.07 24.63 20.16 22.45 24.32 21.06 28.32 33.37 27.49 21.11 26.87 26.

03 7.27 11.05 6.17 1.98 0.38 22.60 7.38 2.60 14.04 0.35 28.41 12.82 32.08 3.95 21.95 6.12 23.10 6.60 23.85 21.53 22.64 2.98 1.15 66.18 55.93 56.19 5.08 0.16 20.52 5.30 12.18 21.99 0.31 23.06 28.86 49.30 5.24 7.17 9.21 8.08 55.56 4.83 36.04 28.96 3.02 0.59 4.22 1.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.47 58.58 1.49 57.07 0.44 25.16 54.28 1.71 33.Blended Prices.68 7. and All Study Markets are weighted (by market population) averages.14 7. Average Deviation is the average deviation of the market values from their mean (average) value.34 1.64 1.08 17.11 26.58 66.38 28.88 31.(∑x)2 ]/n2.82 95 Retail Gross Product Margin 6.75 28.28 56.73 1.26 5.83 1.45 6.33 9.90 23.38 7.31 28.28 27.83 12.Table J: Study Market Data .06 0.66 28.80 9.23 38.84 5.57 12.64 3.50 10.90 59.29 8.70 22.34 0.35 60.00 0.88 5.79 0.33 .52 30.02 3.29 7.81 28.00 22.91 0.21 8.24 23.20 14.73 22.00 4.94 17.86 28.13 0.68 2.92 22.73 2.43 23.16 3.29 24.44 56.17 11.00 58.42 2.20 5.53 6.36 20.48 7.22 14.51 11.41 7.03 28.37 26.25 1.27 60.12 6. MJ ERVIN & ASSOCIATES 98 .76 5.56 24.07 0.36 0.47 0.96 28.83 21.13 11.80 1.21 24.89 28.39 56.11 31.78 2.81 26.83 27.77 5.94 22.91 29.033 0.84 28.28 1. Urban.89 0.77 37.96 27.27 62.73 10.38 0.85 11.91 2.53 21.75 23.98 31.68 7.89 21.13 28. Costs.14 60.17 26.50 3.41 29. Variance uses the formula [n∑x2 .26 27.63 60.64 3.44 33.35 58.63 58.82 3.49 2.79 33.43 0.26 3.54 50.18 7.31 0.97 0.01 31.94 Note: Regional.85 26.62 56.06 5.93 22.24 7.02 22. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.98 0.04 22.32 31.50 58.02 13.99 2.07 30.96 25.04 23.85 24.35 27.45 1.23 7.31 34.22 5.27 6.10 3.77 30.72 26.50 0.91 22.01 0.

246 $ 118.004.995 $ 234.144 2.289 981.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.719 3.658.694 3.638 2.129 $ 97.000 $ 156.772.481 $ 96.302 $ 69.197.071. Outlet Costs.688 $ 85.900 $ 179.542.550 $ 177. these averages are based on all applicable study markets.244 95 net retail Ancillary Revenue petroleum revenue $ 208.241) $ (227.135 $ 199.394.332) $ (238.224 $ 189. Revenue.604.000 2.948 3.890.011.098.640 4.648 3. MJ ERVIN & ASSOCIATES 99 . but for ancillary revenue.478 4.217 2.014. For 95 net retail petroleum revenue.208) $ (226. Urban.526 $ 207.780 $ 85.095.856 3.120 $ 54. outlet costs.913 $ 139.247 4.510 $ 60.250.032 $ 77.564 $ 252.623 2.805.766) $ (274.502 $ (80) $ 60.157.375) $ (49.209 $ 26.010 1.067 $ 92.677 $ 180.550 694.993 $ 113.209 $ 82.429 $ 238.000) $ (241.630 3.544 $ 175.875 $ 255.934 3.622 $ 174.Table K: Study Market Data .Sales.013 $ 227.966 3.707 $ 260. and consolidated outlet income these averages are based only on those markets with available data.911) $ (166.956) $ 200.885.572) $ (286.272 $ 118.023 $ (15. and All Study Markets are weighted (by market population) averages.871) $ (128.058.102 $ 223.098 $ (320.716 Note: Regional.520 5.117 $ 207.626 $ 81.827.223.794 3.632 $ 256.143) $ (249.779 $ 121.866) $ (244.837 $ 56.800 $ 225.263 $ 60.265.279 $ 154.646) $ (98.557) $ 102.746 $ (374.467 $ 96.900 2.855 $ 278.272 $ 210.852) $ 119.089.074 $ 131.542 $ 222.068 3.295 $ 174.066 3.367) $ (164.750 $ 271.465. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.081 $ 222.

89 7.90 13 4.48 7 7.98 7.91 17 4.20 17 14.17 19 9.08 16 3. rank* 3.29 1.40 1 3.145 81.870 120.97 8.38 0.85 15 11. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.675 179.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.43 12.21 0.84 12 5.310 1.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.06 5.10 3.06 1 5. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.30 0.79 6.014 5.73 14. inverse ranking is used (lowest value = 1).27 0.45 0.95 3 9.775 678.76 18 5.400 74.465 694 3.88 11 8. MJ ERVIN & ASSOCIATES 100 .Demographic Profiles Population pop’n 299 .41 0.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.275.53 10 6.04 15 4.36 5.827 3.00 11.20 0.73 5 10.68 4 7.91 12.08 3.098 4.50 8.33 0.51 9 11.058 1.542.095 3.223 3.000 pop’n No.52 13 5.22 3.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.475 3.745 16.23 6 7.715 14.08 4 2.604 3.06 16 4.80 10 4.265 2.157 2.315 710.40 9 4.28 17.55 19 11. of Outlets No.50 9.23 8 31.550 1.41 1.250 981 2.585 6.658 3.02 0.089 3.88 12 7.01 7 2.004 3.42 5 14.970 330. N refers to study sample size (total = 481).96 5.845 15.45 14.60 3.24 0.Table L: Study Market Data .50 3 10.89 2 4.13 2 11.47 7.394 2.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.22 0.775. of Brands No.98 6.47 14 3.27 1.54 6 2.30 1.071 2.605 16.180 616.60 11 7.29 8 7.975 2.790 1.

K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Ottawa ON. They work with major oil companies in benchmarking performance in the retail. Ottawa ON. They maintain a large database of historical prices at most major centres. Contact: Michael J. health. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Petroleum Products Address: 235 Queen Street. Principal Address: #400. The SCF is the basis for this study. Ottawa ON. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). a series of studies whose goal is to strengthen Canada’s competitiveness. safety and business issues. Ervin. aviation and lubricants marketing channels. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Contact: Brendan Hawley. bulk.14th Street NW Calgary AB. generate jobs and growth. and provide background resources to industry public affairs managers and the media. Contact: Maureen Monaghan Address: 580 Booth Street. Contact: Cindy Christopher. 119 . and in doing so.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Vice President Public Affairs Address: 275 Slater Street. accessible through a public fax-back dial-in system. cardlock.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Senior Advisor.

Its monthly publication “Refined Petroleum Products” (cat. Supervisor. Contact: Robert Curran. Contact: Gerard O’Connor.6th Avenue. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Executive Director Address: 214.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Contact: Len Bradley.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. 311 . K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .Octane Magazine Octane is Canada’s refining and marketing trade journal. Calgary AB.ab. 101 .6th Ave. and is a useful “window” on this industry. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Managing Editor Address: Suite 2450. SW Calgary. Ottawa ON. no 45-004) is a useful source of supply and demand volume data. Energy Section Address: Statistics Canada. Octane is published quarterly. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.

Sign up to vote on this title
UsefulNot useful